On Adoption of New Technology under Uncertainty

Investment in new or improved technology is among the most important decisions that companies make, because of the initial cost associated with technology adoption and the impact on company's performance over many years. Company's decision about adoption of new technologies is a trade-off between the cost of making a mistake by adopting too soon and the opportunity cost of waiting for arrival of even better technology. The uncertainty in the speed of new technology arrivals and the extent of technological improvements influences the adoption decision. This paper continues the line of research that considers the innovation process as a stochastic process with the improvements in new technology described by the Poisson jump process. The focus of early research was on innovation process characterised by a single stochastic variable (namely, the technological efficiency parameter) describing the extent of technology improvements. A critical (threshold) value of the efficiency that triggers technology adoption was established for such a case. This paper studies the situation common in the minerals processing industry, where not only the efficiency of new technology under development, but also its operating costs may change in a random fashion. This paper extends previous research to the following situations: (1) the efficiency of new technology remains unchanged, while the operating costs decrease randomly, following the Poisson jump process; (2) both the efficiency and the operating costs of new technology change in a random fashion. This case studies two possibilities: (a) the operating cost is a function of the efficiency, and (b) both the efficiency and the operating costs of new technology follow the Poisson jump process with independent jump sizes but the same arrival times. This paper establishes, for the first time, a threshold curve that separates the plane of feasible values of the efficiency and the operating costs of new technologies into two regions: (1) a waiting region, where new technology adoption is still not optimal and (2) an adoption region. The threshold curve represents a decision boundary that can assist companies in making optimal strategic decisions under uncertainty. Numerical illustrations of the behaviour of the threshold curve with change in model parameters describing the market conditions and the characteristics of the stochastic innovation process are provided. The results show that the adoption decision is significantly affected by the market price of the product (commodity), and the extent of technological improvements the company expects to occur over time.