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What Is Research and Development?

• Understanding R&D
• Types of R&D
• Pros and Cons
• Considerations
• R&D vs. Applied Research
• R&D Tax Credits

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• Business Essentials

What Is Research and Development (R&D)?

Investopedia / Ellen Lindner

Research and development (R&D) is the series of activities that companies undertake to innovate. R&D is often the first stage in the development process that results in market research product development, and product testing.

Key Takeaways

• Research and development represents the activities companies undertake to innovate and introduce new products and services or to improve their existing offerings.
• R&D allows a company to stay ahead of its competition by catering to new wants or needs in the market.
• Companies in different sectors and industries conduct R&D—pharmaceuticals, semiconductors, and technology companies generally spend the most.
• R&D is often a broad approach to exploratory advancement, while applied research is more geared towards researching a more narrow scope.
• The accounting for treatment for R&D costs can materially impact a company's income statement and balance sheet.

Understanding Research and Development (R&D)

The concept of research and development is widely linked to innovation both in the corporate and government sectors. R&D allows a company to stay ahead of its competition. Without an R&D program, a company may not survive on its own and may have to rely on other ways to innovate such as engaging in mergers and acquisitions (M&A) or partnerships. Through R&D, companies can design new products and improve their existing offerings.

R&D is distinct from most operational activities performed by a corporation. The research and/or development is typically not performed with the expectation of immediate profit. Instead, it is expected to contribute to the long-term profitability of a company. R&D may often allow companies to secure intellectual property, including patents , copyrights, and trademarks as discoveries are made and products created.

Companies that set up and employ departments dedicated entirely to R&D commit substantial capital to the effort. They must estimate the risk-adjusted return on their R&D expenditures, which inevitably involves risk of capital. That's because there is no immediate payoff, and the return on investment (ROI) is uncertain. As more money is invested in R&D, the level of capital risk increases. Other companies may choose to outsource their R&D for a variety of reasons including size and cost.

Companies across all sectors and industries undergo R&D activities. Corporations experience growth through these improvements and the development of new goods and services. Pharmaceuticals, semiconductors , and software/technology companies tend to spend the most on R&D. In Europe, R&D is known as research and technical or technological development.

Many small and mid-sized businesses may choose to outsource their R&D efforts because they don't have the right staff in-house to meet their needs.

Types of Research and Development (R&D)

There are several different types of R&D that exist in the corporate world and within government. The type used depends entirely on the entity undertaking it and the results can differ.

Basic Research

There are business incubators and accelerators, where corporations invest in startups and provide funding assistance and guidance to entrepreneurs in the hope that innovations will result that they can use to their benefit.

M&As and partnerships are also forms of R&D as companies join forces to take advantage of other companies' institutional knowledge and talent.

Applied Research

One R&D model is a department staffed primarily by engineers who develop new products —a task that typically involves extensive research. There is no specific goal or application in mind with this model. Instead, the research is done for the sake of research.

Development Research

This model involves a department composed of industrial scientists or researchers, all of who are tasked with applied research in technical, scientific, or industrial fields. This model facilitates the development of future products or the improvement of current products and/or operating procedures.

The largest companies may also be the ones that drive the most R&D spend. For example, Amazon has reported $1.147 billion of research and development value on its 2023 annual report.

Advantages and Disadvantages of R&D

There are several key benefits to research and development. It facilitates innovation, allowing companies to improve existing products and services or by letting them develop new ones to bring to the market.

Because R&D also is a key component of innovation, it requires a greater degree of skill from employees who take part. This allows companies to expand their talent pool, which often comes with special skill sets.

The advantages go beyond corporations. Consumers stand to benefit from R&D because it gives them better, high-quality products and services as well as a wider range of options. Corporations can, therefore, rely on consumers to remain loyal to their brands. It also helps drive productivity and economic growth.

Disadvantages

One of the major drawbacks to R&D is the cost. First, there is the financial expense as it requires a significant investment of cash upfront. This can include setting up a separate R&D department, hiring talent, and product and service testing, among others.

Innovation doesn't happen overnight so there is also a time factor to consider. This means that it takes a lot of time to bring products and services to market from conception to production to delivery.

Because it does take time to go from concept to product, companies stand the risk of being at the mercy of changing market trends . So what they thought may be a great seller at one time may reach the market too late and not fly off the shelves once it's ready.

Facilitates innovation

Improved or new products and services

Expands knowledge and talent pool

Increased consumer choice and brand loyalty

Economic driver

Financial investment

Shifting market trends

R&D Accounting

R&D may be beneficial to a company's bottom line, but it is considered an expense . After all, companies spend substantial amounts on research and trying to develop new products and services. As such, these expenses are often reported for accounting purposes on the income statement and do not carry long-term value.

There are certain situations where R&D costs are capitalized and reported on the balance sheet. Some examples include but are not limited to:

• Materials, fixed assets, or other assets have alternative future uses with an estimable value and useful life.
• Software that can be converted or applied elsewhere in the company to have a useful life beyond a specific single R&D project.
• Indirect costs or overhead expenses allocated between projects.
• R&D purchased from a third party that is accompanied by intangible value. That intangible asset may be recorded as a separate balance sheet asset.

R&D Considerations

Before taking on the task of research and development, it's important for companies and governments to consider some of the key factors associated with it. Some of the most notable considerations are:

• Objectives and Outcome: One of the most important factors to consider is the intended goals of the R&D project. Is it to innovate and fill a need for certain products that aren't being sold? Or is it to make improvements on existing ones? Whatever the reason, it's always important to note that there should be some flexibility as things can change over time.
• Timing: R&D requires a lot of time. This involves reviewing the market to see where there may be a lack of certain products and services or finding ways to improve on those that are already on the shelves.
• Cost: R&D costs a great deal of money, especially when it comes to the upfront costs. And there may be higher costs associated with the conception and production of new products rather than updating existing ones.
• Risks: As with any venture, R&D does come with risks. R&D doesn't come with any guarantees, no matter the time and money that goes into it. This means that companies and governments may sacrifice their ROI if the end product isn't successful.

Research and Development vs. Applied Research

Basic research is aimed at a fuller, more complete understanding of the fundamental aspects of a concept or phenomenon. This understanding is generally the first step in R&D. These activities provide a basis of information without directed applications toward products, policies, or operational processes .

Applied research entails the activities used to gain knowledge with a specific goal in mind. The activities may be to determine and develop new products, policies, or operational processes. While basic research is time-consuming, applied research is painstaking and more costly because of its detailed and complex nature.

R&D Tax Credits

The IRS offers a R&D tax credit to encourage innovation and significantly reduction their tax liability. The credit calls for specific types of spend such as product development, process improvement, and software creation.

Enacted under Section 41 of the Internal Revenue Code, this credit encourages innovation by providing a dollar-for-dollar reduction in tax obligations. The eligibility criteria, expanded by the Protecting Americans from Tax Hikes (PATH) Act of 2015, now encompass a broader spectrum of businesses. The credit tens to benefit small-to-midsize enterprises.

To claim R&D tax credits, businesses must document their qualifying expenses and complete IRS Form 6765 (Credit for Increasing Research Activities). The credit, typically ranging from 6% to 8% of annual qualifying expenses, offers businesses a direct offset against federal income tax liabilities. Additionally, businesses can claim up to $250,000 per year against their payroll taxes.

Example of Research and Development (R&D)

One of the more innovative companies of this millennium is Apple Inc. As part of its annual reporting, it has the following to say about its research and development spend:

In 2023, Apple reported having spent $29.915 billion. This is 8% of their annual total net sales. Note that Apple's R&D spend was reported to be higher than the company's selling, general and administrative costs (of $24.932 billion).

Note that the company doesn't go into length about what exactly the R&D spend is for. According to the notes, the company's year-over-year growth was "driven primarily by increases in headcount-related expenses". However, this does not explain the underlying basis carried from prior years (i.e. materials, patents, etc.).

Research and development refers to the systematic process of investigating, experimenting, and innovating to create new products, processes, or technologies. It encompasses activities such as scientific research, technological development, and experimentation conducted to achieve specific objectives to bring new items to market.

What Types of Activities Can Be Found in Research and Development?

Research and development activities focus on the innovation of new products or services in a company. Among the primary purposes of R&D activities is for a company to remain competitive as it produces products that advance and elevate its current product line. Since R&D typically operates on a longer-term horizon, its activities are not anticipated to generate immediate returns. However, in time, R&D projects may lead to patents, trademarks, or breakthrough discoveries with lasting benefits to the company. 

Why Is Research and Development Important?

Given the rapid rate of technological advancement, R&D is important for companies to stay competitive. Specifically, R&D allows companies to create products that are difficult for their competitors to replicate. Meanwhile, R&D efforts can lead to improved productivity that helps increase margins, further creating an edge in outpacing competitors. From a broader perspective, R&D can allow a company to stay ahead of the curve, anticipating customer demands or trends.

There are many things companies can do in order to advance in their industries and the overall market. Research and development is just one way they can set themselves apart from their competition. It opens up the potential for innovation and increasing sales. However, it does come with some drawbacks—the most obvious being the financial cost and the time it takes to innovate.

Amazon. " 2023 Annual Report ."

Internal Revenue Service. " Research Credit ."

Internal Revenue Service. " About Form 6765, Credit for Increasing Research Activities ."

Apple. " 2023 Annual Report ."

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Introduction and definitions

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research and development , in industry , two intimately related processes by which new products and new forms of old products are brought into being through technological innovation .

Research and development, a phrase unheard of in the early part of the 20th century, has since become a universal watchword in industrialized nations. The concept of research is as old as science; the concept of the intimate relationship between research and subsequent development, however, was not generally recognized until the 1950s. Research and development is the beginning of most systems of industrial production. The innovations that result in new products and new processes usually have their roots in research and have followed a path from laboratory idea, through pilot or prototype production and manufacturing start-up, to full-scale production and market introduction. The foundation of any innovation is an invention . Indeed, an innovation might be defined as the application of an invention to a significant market need. Inventions come from research—careful, focused, sustained inquiry, frequently trial and error. Research can be either basic or applied, a distinction that was established in the first half of the 20th century.

Basic research is defined as the work of scientists and others who pursue their investigations without conscious goals, other than the desire to unravel the secrets of nature. In modern programs of industrial research and development, basic research (sometimes called pure research) is usually not entirely “pure”; it is commonly directed toward a generalized goal, such as the investigation of a frontier of technology that promises to address the problems of a given industry. An example of this is the research being done on gene splicing or cloning in pharmaceutical company laboratories.

Applied research carries the findings of basic research to a point where they can be exploited to meet a specific need, while the development stage of research and development includes the steps necessary to bring a new or modified product or process into production. In Europe , the United States , and Japan the unified concept of research and development has been an integral part of economic planning , both by government and by private industry.

The first organized attempt to harness scientific skill to communal needs took place in the 1790s, when the young revolutionary government in France was defending itself against most of the rest of Europe. The results were remarkable. Explosive shells, the semaphore telegraph, the captive observation balloon, and the first method of making gunpowder with consistent properties all were developed during this period.

The lesson was not learned permanently, however, and another half century was to pass before industry started to call on the services of scientists to any serious extent. At first the scientists consisted of only a few gifted individuals. Robert W. Bunsen, in Germany, advised on the design of blast furnaces. William H. Perkin, in England, showed how dyes could be synthesized in the laboratory and then in the factory. William Thomson (Lord Kelvin), in Scotland, supervised the manufacture of telecommunication cables. In the United States, Leo H. Baekeland, a Belgian, produced Bakelite, the first of the plastics. There were inventors, too, such as John B. Dunlop, Samuel Morse, and Alexander Graham Bell , who owed their success more to intuition , skill, and commercial acumen than to scientific understanding.

While industry in the United States and most of western Europe was still feeding on the ideas of isolated individuals, in Germany a carefully planned effort was being mounted to exploit the opportunities that scientific advances made possible. Siemens, Krupp, Zeiss, and others were establishing laboratories and, as early as 1900, employed several hundred people on scientific research. In 1870 the Physicalische Technische Reichsanstalt (Imperial Institute of Physics and Technology) was set up to establish common standards of measurement throughout German industry. It was followed by the Kaiser Wilhelm Gesellschaft (later renamed the Max Planck Society for the Advancement of Science), which provided facilities for scientific cooperation between companies.

In the United States, the Cambria Iron Company set up a small laboratory in 1867, as did the Pennsylvania Railroad in 1875. The first case of a laboratory that spent a significant part of its parent company’s revenues was that of the Edison Electric Light Company, which employed a staff of 20 in 1878. The U.S. National Bureau of Standards was established in 1901, 31 years after its German counterpart, and it was not until the years immediately preceding World War I that the major American companies started to take research seriously. It was in this period that General Electric , Du Pont, American Telephone & Telegraph, Westinghouse, Eastman Kodak, and Standard Oil set up laboratories for the first time.

Except for Germany, progress in Europe was even slower. When the National Physical Laboratory was founded in England in 1900, there was considerable public comment on the danger to Britain’s economic position of German dominance in industrial research, but there was little action. Even in France, which had an outstanding record in pure science , industrial penetration was negligible.

World War I produced a dramatic change. Attempts at rapid expansion of the arms industry in the belligerent as well as in most of the neutral countries exposed weaknesses in technology as well as in organization and brought an immediate appreciation of the need for more scientific support. The Department of Scientific and Industrial Research in the United Kingdom was founded in 1915, and the National Research Council in the United States in 1916. These bodies were given the task of stimulating and coordinating the scientific support to the war effort, and one of their most important long-term achievements was to convince industrialists, in their own countries and in others, that adequate and properly conducted research and development were essential to success.

At the end of the war the larger companies in all the industrialized countries embarked on ambitious plans to establish laboratories of their own; and, in spite of the inevitable confusion in the control of activities that were novel to most of the participants, there followed a decade of remarkable technical progress. The automobile, the airplane, the radio receiver, the long-distance telephone, and many other inventions developed from temperamental toys into reliable and efficient mechanisms in this period. The widespread improvement in industrial efficiency produced by this first major injection of scientific effort went far to offset the deteriorating financial and economic situation.

The economic pressures on industry created by the Great Depression reached crisis levels by the early 1930s, and the major companies started to seek savings in their research and development expenditure. It was not until World War II that the level of effort in the United States and Britain returned to that of 1930. Over much of the European continent the depression had the same effect, and in many countries the course of the war prevented recovery after 1939. In Germany Nazi ideology tended to be hostile to basic scientific research, and effort was concentrated on short-term work.

The picture at the end of World War II provided sharp contrasts. In large parts of Europe industry had been devastated, but the United States was immensely stronger than ever before. At the same time the brilliant achievements of the men who had produced radar, the atomic bomb , and the V-2 rocket had created a public awareness of the potential value of research that ensured it a major place in postwar plans. The only limit was set by the shortage of trained persons and the demands of academic and other forms of work.

Since 1945 the number of trained engineers and scientists in most industrial countries has increased each year. The U.S. effort has stressed aircraft, defense, space, electronics , and computers. Indirectly, U.S. industry in general has benefited from this work, a situation that compensates in part for the fact that in specifically nonmilitary areas the number of persons employed in the United States is lower in relation to population than in a number of other countries.

Outside the air, space, and defense fields the amount of effort in different industries follows much the same pattern in different countries, a fact made necessary by the demands of international competition. (An exception was the former Soviet Union , which devoted less R and D resources to nonmilitary programs than most other industrialized nations.) An important point is that countries like Japan, which have no significant aircraft or military space industries, have substantially more manpower available for use in the other sectors. The preeminence of Japan in consumer electronics, cameras, and motorcycles and its strong position in the world automobile market attest to the success of its efforts in product innovation and development.

Research and Development (R&D)

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Mode 2 knowledge production (Mode 2) ; Mode 2 knowledge production ; Research and development and innovations (R&D&I)

Research and development (R&D) is a broad category describing the entity of basic research, applied research, and development activities. In general research and development means systematic activities in order to increase knowledge and use of this knowledge when developing new products, processes, or services. Nowadays innovation activities are strongly tight into the concept of research and development. In the broadest meaning, research and development consists of every activity from the basic research to the (successful) marketing of a product or (effective) launching of a new process (R&D&I).

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Research and development work is mostly related to business organizations. Development activities are targeted for them to development of new products and their success within the markets. A new product can be seen as the end of the chain of which...

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Gibbons, M., Limoges, C., Nowotny, H., Schwartzman, S., Scott, P., & Trow, M. (1994). The new production of knowledge: The dynamics of science and research in contemporary societies . London: Sage.

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Gulbrandsen, M. The role of basic research in innovation. Confluence , 55 . Retrieved from http://www.cas.uio.no/Publications/Seminar/Confluence_Gulbrandsen.pdf

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Kainulainen, S. (2014). Research and Development (R&D). In: Michalos, A.C. (eds) Encyclopedia of Quality of Life and Well-Being Research. Springer, Dordrecht. https://doi.org/10.1007/978-94-007-0753-5_2482

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