Note on gross capital formation and R&D expenditure

Abstract

Companies often consider the cost of R&D projects (especially salaries paid to R&D personnel) as part of their current expenses. Companies continue to do this practice even without exactly specifying what they mean by R&D project costs. This practice is misleading because spending on research is undeniably a form of fixed capital investment, even more so than the item that economists consider as the epitome of fixed capital investment -purchase of machinery.As Salter (1966) observed in relation to sunk costs in machinery, this amount may only be recovered by continuing with the investment over several production cycles, no matter what the effective returns are.The 'capitalist' nature of R&D is, if anything, even more apparent than that of the machinery that a company buys from its supplier of capital goods. In fact, the gradual accumulation of capital through sustained investment over time in R&D projects is, if considered in relation to a company's profit profile, similar to the gradual construction of a production plant.The depreciation of research spending begins even before the productive use of the capital good, which the spending (or funding) is actually intended to create (the original and possibly useful knowledge it produces). The same does not hold true for machinery purchased ready for use. In this case, depreciation generally begins immediately after the machinery has entered the company and begun to produce.

Note on R&D expenditures and fixed capital formation

“…These expenditures are not included in investments in fixed capital goods devoted to research and development (De Marchi and Rocchi 2005).…”