Investment Choices in Industry lays the groundwork for increasingly broader and more varied application of portfolio theory to the making of operating decisions in firms. Portfolio theory until now has been used mainly to allocate investments in financial assets such as stocks and bonds; here Constance Helfat extends the theory to evaluate the risk of nonfinancial investment decisions in firms. Analyzing the investment and R & D decisions of large oil companies, she uses portfolio theory as a tool to predict firm behavior and proposes that, when making internal resource allocations, firms seek not only to earn profits but also to minimize total firm investment risk as well. Helfat's study differs from existing work in a number of respects. The theoretical model it develops (an adaptation of the Tobin-Markowitz portfolio selection model of stock market investment) is highly comprehensive. It focuses on the composition of a firm's investment portfolio as well as on the risk and return characteristics of each individual investment. The model also incorporates the dependence of certain asset prices - such as those determined by auction - on internal firm covariance risk. Unlike many empirical studies, the method used in implementing the model relies on micro-level, projectspecific data to forecast ex ante risks and returns to firm investments. Finally, Helfat uses a unique data set - the Financial Reporting System of the U.S. Department of Energy - to analyze the composition of actual investment expenditures in the petroleum industry.
