Abstract
Japanese pharmaceutical firms have increased its R&D investment in the 1980s. This study investigates the relationship between a firm performance and R&D investment of the industry. Utilizing the q-ratio defined as the ratio of the firm value to the replacement cost of underlying assets, this study estimates the effects of R&D investments on the firm value. The results indicate that the value of R&D activities has increased in the late 1980s. In particular, R&D capital and the quality of patents have the positive effects on the fundamental value of the firm which is defined as the discounted future cash flow. The results also suggest that the optimal sale size of pharmaceutical firms was just less than 600 billion yen (1990 price) in the late 1980s. Most Japanese pharmaceutical firms are too small to exploit the positive effects of scale on the fundamental value.
