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...

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.