Abstract
In this chapter, we look at the connection between technology and finance. This is important since given a finite R&D investment ceiling, technologies have to be rank-ordered using the “value” they can deliver to their parent system. First, we take a macroeconomic perspective by considering what has been the impact of technical innovation on so-called “total factor productivity,” which according to Bob Solow’s work (1957), has been an important factor in overall advancement of economic output. We then look at the role of research and development (R&D) investments and its impact on the profit and loss statement (P/L) as well as the balance sheet of individual firms. Some examples of corporate R&D portfolios (at least what is publicly available) will be discussed. We close by looking at technology valuation (TeVa) to translate technical figures of merit (FOM) into financial ones. We use the case of a hypothetical commuter airline as a simplified case study to illustrate how technical FOMs can be quantified in financial terms.
This is a preview of subscription content, log in via an institution to check access.
Access this chapter
Tax calculation will be finalised at checkout
Purchases are for personal use only
Notes
- 1.
Bob Solow received the Nobel Prize in Economics in 1987 for his work on economic growth modeling.
- 2.
Both capital K and labor L account for active workers and capital assets in use. This means that unemployment and idle machinery have to be corrected for, that is, removed from the calculation.
- 3.
It is possible that economic output in the 1918–1919 years was also affected by the Spanish Flu.
- 4.
Productivity growth of both agriculture and governmental work have also been studied, but are not discussed here.
- 5.
The degree to which granted patents are allowed to be capitalized on the balance sheet (B/S) depends on the particular accounting rules and jurisdiction. In the United States, companies are in general not allowed to capitalize their patents on their balance sheets. This is so because the value of a patent is very difficult to estimate and if companies were allowed to arbitrarily assign an economic value to their patents there would be a danger that they could artificially inflate their balance sheets. The only exception to this rule is when patents are acquired from another company or through an M&A process, in which case price and valuation of the IP are available.
- 6.
For example R&D that aims at improving manufacturing processes.
- 7.
For example in Fig. 8.30, we highlighted some selected technologies in the area of digital design and manufacturing (DDM) such as model-based systems engineering (MBSE) and collaborative and reconfigurable robotics which are primarily targeted at improving productivity in design and manufacturing.
- 8.
- 9.
Some companies maintain specialized groups whose mission it is to estimate the value of technological improvements. At Airbus this group is called Technology Valuation, or TeVa for short.
- 10.
- 11.
The U.S. 30-Year Treasury bond rate was 2.6% as of August 2019.
- 12.
This means that during 10% of the days per year (36 days) the aircraft is on ground (AOG) where it is subject to preventative and unplanned maintenance (repairs). Note that the ambition of most modern aircraft manufacturers is to eventually have a “zero AOG” aircraft that doesn’t require significant maintenance or downtime. We are quite far from this in reality, but it is a major ambition of technology roadmapping in the aviation industry.
- 13.
These numbers are from summer 2019 and predate the COVID-19 pandemic which has significantly affected the airline industry.
- 14.
A more fine-grained analysis would include earlier costs, for example, starting in year 8, due to manufacturing of long-lead items such as engines and wings.
- 15.
This is the sixth column in Table 17.6.
- 16.
Technology selection is indicated by an “X” mark in the last two columns. A mark of “>” indicates the intended reuse of technology (potentially with some adaptations) on a subsequent aircraft.
- 17.
It is interesting to note that for the A320neo program a new engine, the PW-1100G geared turbofan (GTF) engine, was selected and developed due to its fuel efficiency (−15%) and noise benefits (−50%). However, the estimated $10 billion in development costs was mainly borne by its supplier, Pratt & Whitney.
References
Crawley, Edward, Bruce Cameron, and Daniel Selva. System architecture: strategy and product development for complex systems. Prentice Hall Press, 2015.
de Neufville R, Scholtes S. “Flexibility in engineering design”. MIT Press; 2011.
Markish, Jacob, and Karen Willcox. “Value-Based multidisciplinary techniques for commercial aircraft system design.” AIAA journal 41, no. 10 (2003): 2004-2012.
Morbey, Graham K., and Robert M. Reithner. “How R&D affects sales growth, productivity and profitability.” Research-Technology Management 33, no. 3 (1990): 11-14.
Shishko, Robert, Donald H. Ebbeler, and George Fox. “NASA technology assessment using real options valuation.” Systems Engineering 7, no. 1 (2004): 1-13.
Solow, Robert M. “Technical change and the aggregate production function”. Review of Economics and Statistics. 39 (3): 312–20. doi:10.2307/1926047. (1957) JSTOR 1926047
Author information
Authors and Affiliations
Rights and permissions
Copyright information
© 2022 Springer Nature Switzerland AG
About this chapter
Cite this chapter
de Weck, O.L. (2022). Technology Valuation and Finance. In: Technology Roadmapping and Development . Springer, Cham. https://doi.org/10.1007/978-3-030-88346-1_17
Download citation
DOI: https://doi.org/10.1007/978-3-030-88346-1_17
Published:
Publisher Name: Springer, Cham
Print ISBN: 978-3-030-88345-4
Online ISBN: 978-3-030-88346-1
eBook Packages: EngineeringEngineering (R0)