Research and Development (R&D)
By WILL KENTON
Updated Jun 25, 2019
What Is Research and Development (R&D)?
Research and development (R&D) refers to the activities
companies undertake to innovate and introduce new products
and services. It is often the first stage in the development
process. The goal is typically to take new products and services
to market and add to the company's bottom line.
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, semiconductor, 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 (RTD).
KEY TAKEAWAYS
R&D 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.
Companies in different sectors and industries conduct
R&D; pharmaceuticals, semiconductor, and technology
companies generally spend the most.
Understanding Research and Development (R&D)
The term R&D is widely linked to innovation both in the
corporate and government world or the public and private
sectors. R&D allows a company to stay on top 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 separate 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 lead to
patents, copyrights, and trademarks as discoveries are made
and products created.
Companies that set up and employ entire R&D departments
commit substantial capital to the effort. They must estimate
the risk-adjusted return on their R&D expenditures—which
inevitably involves risk of capital—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.
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.
Activities classified as R&D may differ from one company to
the next. However, standard primary models have been
identified and exist across different organizations and sectors.
Basic R&D Organizational Models
One 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, it is research done for the sake of research.
The second 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.
There are also business incubators and accelerators, where
corporations invest in startups and provide funding assistance
and guidance to entrepreneurs in the hope that new
innovations will result that they can use to their benefit.
Also, M&As and partnerships are also forms of R&D as
companies join forces to take advantage of other companies'
institutional knowledge and talent.
Basic Research Versus 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 understanding and
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.
Special Considerations
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 reported for accounting
purposes. Any basic and applied research costs are recorded as
they are incurred. But development costs can be carried
forward.
Who Spends the Most on R&D?
Companies spend billions of dollars on R&D to produce the
newest, most sought-after products. According to the
professional services firm, PriceWaterhouseCoopers, the
following ten companies spent the most on innovation and
improvements in 2018:
Amazon: $22.6 billion
Alphabet, Inc.: $16.2 billion
Volkswagen: $15.8 billion
Samsung: $15.3 billion
Intel: $13.1 billion
Microsoft: $12.3 billion
Apple: $11.6 billion
Roche: $10.8 billion
Johnson & Johnson: $10.6 billion
Merck: $10.2 billion
Resources: https://www.investopedia.com/terms/r/randd.asp
