Depreciation of Business R&D Capital

R&D depreciation rates are critical to calculating the rates of return to R&D investments and capital service costs, which are important for capitalizing R&D investments in the national income accounts and harmonizing BEA statistics with those of the productivity program of BLS. Although important, measuring R&D depreciation rates is extremely difficult because both the price and output of R&D capital are generally unobservable. To resolve these difficulties, economists have adopted various approaches to estimate industry-specific R&D depreciation rates, but the differences in their results cannot easily be reconciled. In addition, many of their calculations rely on unverifiable or oversimplified assumptions. As of now, measuring R&D depreciation rates remains an unresolved problem. To incorporate the effect of industries’ technological and competition environments, as well as gestation lags, I develop an R&D investment model to derive industry-specific R&D depreciation rates for four R&D intensive industries, the pharmaceutical industry, the IT hardware industry, the semiconductor industry, and the software industry. Based on Compustat company-based dataset, the model has produced results that not only align with conclusions from most recent literature but also indicate the dynamic technological changes across industries. The data cover the period from 1989 to 2008. The constant industry-specific R&D depreciation rates are: 11.82 ± 0.73 % for the pharmaceutical industry, 37.64 ± 1.00 % for the IT hardware industry, 17.95 ± 1.78 % for the semiconductor industry, and 30.17 ± 1.89 % for the software industry. The industry rankings of these R&D depreciation rates are consistent with the conclusions in most recent literature. Time-varying industry-specific R&D depreciation rates are also presented in this paper, and they further enhance our understanding about the dynamics of technological change and competition across industries. Preliminary version. Please do not circulate. Date: June 28, 2010 Wendy Li 2