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In: Chapters. RePEc:elg:eechap:13561_13.

Full description at Econpapers

Accordingly, an R&D-based measure of a firm’s technological knowledge has been often computed as the capitalization of present and past R&D expenditures using a perpetual inventory formula like that used for tangible capital (Griliches and Mairesse, 1984; Hall, 1990): Kit = (1 2 d) Ki,t-1 + Rit [A2.2] where Kit is the R&D capital at time t, Rit is annual R&D expenditures at time t and d is the depreciation rate of the R&D capital from year t-1 to year t. The use of expression [A2.2] to capitalize R&D investments is needed because the Generally Accepted Accounting Principles (GAAP) in the US and the IAS accounting standards in Europe require R&D costs to be expensed as incurred (with a few exceptions) because of the lack of a clear link between these expenses and subsequent earnings. The use of a depreciation rate is justified by the fact that knowledge tends to decay or become obsolescent over time, losing economic value due to advances in technology.