Economic Analysis of R&D Financing : A Case of Pharmaceutical Industry

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SummaryThis study investigates financing decision of R&D of pharmaceutical firms. R&D investment is determined by the profitability of the R&D project and cash generated by a firm. To value R&D project, one must measure the role of cash flow profile of a pharmaceutical firms. I first examined the measurement of profitability of R&D investment by distinguishing accounting return from economic return. Second, I examined the effects of price regulation on demand, profitability of R&D project. Although Japanese price regulation is intended to restrain the expenditure of pharmaceuticals, Japanese pharmaceutical firms expanded their sales by substituting new products for old ones. Third, I investigate the economic roles of social overhead capital in R&D financing.