Valuation of SMEs' innovation investment through real options method

In a global environment of more intense competition, innovation is a key strategic issue for SMEs. Innovation investment has three main characters which are random variations in project value and investment cost during innovation process, and the jump character of project value. Traditional methods of investment valuation can't catch these uncertainties, but the real options with similar characteristics of financial options can do, and can valuate properly the flexibility value of innovation investment. This paper put forward a more general real options model, and applies it to the valuation of innovation investment. In the last, a simulation analysis via Monte Carlo method is applied.