Review of Industrial Organization (2006) 28:145–164 © Springer 2006
The Determinants of Pharmaceutical R&D
Expenditures: Evidence from Japan
ORG C. MAHLICH
and THOMAS ROEDIGER-SCHLUGA
Economic Policy Department, Austrian Federal Economic Chamber, Wiedner Hauptstrasse
63, A-1045 Vienna, Austria.
Department of Technology Policy, ARC systems research, Donau-City-Strasse 1, A-1220
Author for correspondence. E-mail: email@example.com
Abstract. During the past 20 years, the world pharmaceutical industry has experienced
a dramatic increase in R&D intensity. We apply and extend a model developed by
Grabowski and Vernon (2000, Journal of Evolutionary Economics, 10, 201–215) with a
pooled data sample of the 15 publicly listed Japanese drug ﬁrms for the period 1987–
1998. As in the original study, we ﬁnd expected returns to be an important determinant
of R&D spending in the Japanese drug industry, albeit considerably smaller than in the
U.S., which is particularly obvious in the case of returns from newly introduced drugs.
However, our results are sensitive to econometric model speciﬁcation, in particular to con-
trolling for serial correlation and to a dynamic speciﬁcation of the baseline model. Like-
wise, estimates on ﬁnancial constraints are sensitive to model speciﬁcation, indicating that
Japanese drug ﬁrms face small or no ﬁnancial constraints. Our results are consistent with
the general literature on R&D investment behaviour, yet raise some methodological ques-
tions with regard to the original study.
Key words: investment, Japan, panel data estimation, pharmaceuticals, R&D.
JEL Classiﬁcations: L65, O31, O33.
During the past 20 years, the world pharmaceutical industry has experi-
enced a dramatic increase in R&D intensity. In a recent paper, Grabowski
and Vernon (2000) explore the determinants underlying this trend in R&D
investment behaviour for a pooled sample of 11 major U.S. drug ﬁrms over
the period 1974–1994. Estimating a static panel data model, they ﬁnd that
expected returns and cash ﬂow are important explanatory variables of ﬁrm
research intensities during this period.
In this paper, we explore whether similar conclusions also hold for the
Japanese pharmaceutical industry. Given institutional differences and the
differences in the way how ﬁrms are funded in the U.S. and Japan,