Rationalizing investment

New ventures often succeed (eventually) if properly financed and provide handsome returns to their investors Frasch and Union Sulfur are an entrepreneurial success story. The financial support against a balance sheet that defied rational investment paid off handsomely for all concerned. After the fact, it was a brilliant investment. For many years, dividends were 100% per month. They all became rich (actually, in this case, more rich than they had been before). 

E(t) volume of expansionary investment at time t R t) volume of rationalizing investment at time t. ... 

The main proposition of this chapter is that there are considerable fluctuations in the volume of expansionary and rationalizing investment as a result of entrepreneurial innovation and imitation activities. The proportional distribution of the shares of E t) and R (t) in I t) shift with time. As these fluctuations take place around long term average paths Eq (t) and Rq (t) of the expansionary and rationalizing investment it is first appropriate to decompose E t) and R ft) into... 

A fictitious neutral investor who behaves according to the average long term investment trend will first be considered. His investment project of volume i = 1/2 N is composed of expansionary investment eQ and rationalizing investment ro as follows ... 

On the other hand, R-type investors favour the rationalizing investment type in comparison with the average trend. The E/R type shares of their projects are such that... 

The relation between the investors configuration index (5.15) and the investment structure index (5.6) characterizing strategic investment now follows unambiguously by combining the postulated equations. The total expansionary investment E (t) and the total rationalizing investment R (t) at time t are given by... 

The proceeding chapters give wimess of an overwhelming scientific development. Antiviral intervention has become a standard, and the worldwide availability of this innovation is perceived as a humanitarian matter of course with a value of its own. However, such an important therapy progress has to be seen in competition with other allocations of scarce funds. Health care resources are Umited - in one country more than in another, but in principle funds invested to antiretroviral intervention will not be available for prevention of HIV/AIDS or for the cure of other diseases. This fundamental scarcity calls for a rational utilization of existing resources and a scientific calculation of the socio-economic impact of antiretroviral intervention. 

Investment into researching and developing new products in the UK is now running at around 3.2 billion a year and each new medicine takes an average of ten to twelve years to develop before it is authorized for use by doctors, with no guarantee of commercial success. It is vital therefore that the pharmaceutical industry keeps the medical profession informed about its products and promotes their rational use. 

Researchers in end-to-end systems are not paid until after they have sunk their costs. This increases the incentive for sponsors to renege, since a researcher with sunk R D costs can usually be persuaded to sell drugs at a price that barely covers its manufacturing costs. Knowing this dynamic, a rational company may refuse to invest at all unless it receives some combination of (a) contractual and practical assurances that the sponsor will not renege and (b) an additional premium to cover any remaining risk of default. From the sponsor s perspective, this creates an inherent trade-off between the flexibility needed to adjust rewards ex post to reflect true value of drugs and the size of the reward that must be offered ex ante to elicit R D in the first place. 

III.b.1.12. Sufficient government expenditure to ensure availability of medicines and staff Lack of essential medicines leads to the use of non-essential medicines, and lack of appropriately trained personnel leads to irrational prescribing by untrained personnel. Furthermore, without sufficient competent personnel and finances, it is impossible to carry out any of the core components of a national programme to promote rational use of medicines. Poor clinical outcome, needless suffering and economic waste are sufficient reasons for large government investment. 

Consider a firm s decision about how much to invest in research and development. To decide rationally, the firm must estimate the probable outcome of the investment — how likely it is that its innovative activities will lead to a profitable innovation - as well as the investments made by other firms and the probable outcome of those investments. Now the outcome of innovative activities is inherently uncertain. The firm cannot foresee with any precision whether it will hit the jackpot or come out with empty hands. Against the background of a constantly changing technology, past records are not good predictors of future success. 

But why should he do that Since rational behavior is indeterminate in equilibrium, it cannot be sustained by rational considerations. And it is hard to see what else could sustain it. It is highly fragile. Not infrequently, all equilibria are of this son. The research and development game discussed in chapter IV is an illustration. In equilibrium, all firms use a randomizing device to decide how much to invest in research and development. It does not take much knowledge of actual Arms to discredit that idea as a description of what they do. Firms must make a decision, one way or another, but we would not expect their decisions to be best responses to each other. 

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