The real options investment theory shows that greater uncertainty about market revenues reduces current R&D investment by increasing the value of waiting. This paper presents empirical evidence that patent protection mitigates the effect market uncertainty on R&D investment.

Real options investment theory predicts current investment falls as uncertainty about market returns increases. In the case of R&D investment, which is usually considered an irreversible form of investment, this effect should be quite pronounced. This paper tests the real options prediction...