The research and development of pharmaceutical firms depends in part on public financing. These include universities/research institutes, hospitals, regulators, and people as participants in clinical trials. Following the research of Uzawa (1990), this paper analyzes the role of the public sector as social overhead ca pital. Second using case study of Japan, this paper investigates the roles of public sector in basic research, clinical studies, and new drug approval. Compared with the U. S., social overhead capital in Japanese pharmaceutical R&D is insufficient, which in fact limits the accumulation of professional R&D services in public sector. Due to the containment of government spending, Japan will not be able to invest heavily in the public sector. A possible solution is to introduce private R&D service firms with profit motive.