The Estimation of the economic profit rate of Japanese pharmaceutical industry based on the knowledge capital approach

Abstract

R&D expenditure is investment for uncertainty as is the case with equipment investment. But there exists asymmetry between R&D expenditure and equipment investment. The former is regarded as a flow each year and it can not be accumulated as knowledge capital stock according to the accounting rule whereas the latter is regarded as a piece of capital stock and treated as asset. This asymmetry may well give a bias for estimating profitability of investment. In this paper we estimated the stock of knowledge capital by using a neoclassical model. Based on this result we calculated and compared the accounting profit rate and the economic profit rate which integrated knowledge capital into the model. The empirical results revealed that the accounting profit rate is higher than the economic one and may give inaccurate information to the stockholders.