OBJECTIVES: Many countries have to face policy dilemma between cost containment policy and industry policy which may encourage pharmaceutical firms in terms of R&D. This study is trying to investigate the following issues: firstly, it tries to figure out the major determinants of R&D investment of pharmaceutical firms. Secondly, it compares the effects of those determinants on R&D intensity between U.S. and the rest of the world. METHODS: Using a 10 year panel dataset extracted from several sources such as Compustat, KISINFO, PhRMA, and JPMA, this study empirically investigates whether US pharmaceutical market which is relatively unregulated has higher profitability and cash flows than its counterparts where drug prices are regulated by government agencies. Employing OLS, random-effects, and fixed-effects specifications for established R&D investment models from the literature, the study tries to explore the links between pharmaceutical price regulation and firm R&D investment intensity. RESULTS: Data from 32 major pharmaceutical firms have been collected for the years 2000 through 2009, and several models of the determinants of R&D investment were estimated. The regression results show that expected profits and lagged cash flows are principal determinants of firm R&D-to-sales ratios. It has been argued that pharmaceutical price regulation influences R&D investment through both of these channels, resulting in an expected-profit effect and a cash-flow effect. The former influences R&D contemporaneously while the latter effect operates with at least 1 year lag. From a comparison of effects on R&D intensity, U.S. has about 4 or 5 times higher profitability effect than non-U.S. where pharmaceutical price regulation is so strictly implemented. CONCLUSIONS: A slower R&D growth as a consequence of price regulation may be politically acceptable because current consumer can benefit, but we can predict that the cost to the future generations is substantial.