Research & Development (R&D)
What Does Research and Development (R&D) Mean?
The term "research and development" refers to work with the goal of finding new knowledge or inventing new products and services.
Purpose of Research and Development
Typically, R&D involves developing a new product or improving an already existing product.
While R&D is usually conducted to create new products, it can also help acquire knowledge.
Companies should invest in R&D because it is a powerful driver of economic growth and development in the long run.
Types of Research and Development
There are three types of R&D:
Basic research is a primary and original form of investigation undertaken without any commercial objectives in mind.
The goals of basic research are:
- to study a particular subject or phenomenon
- to gain knowledge about it
- to know how to handle it
Basic research provides the first steps in developing a new product or method.
It takes place in academic and commercial settings.
Once basic research has been completed, applied research develops an existing idea into a product or service ready for its introduction to the market.
The goal of this type of R&D is to make the invention viable and cost-efficient for commercial use.
For this approach to work, applied research must occur after the initial investigation, especially if the findings from basic research are complex and difficult to understand.
Unlike applied research, which concentrates on preparing products for the market, development research strives to increase customer productivity by providing tools and equipment to improve the production of goods.
The goal of this type of R&D is to solve customers' problems by simplifying their tasks.
Advantages of Research and Development
Inventions that come from R&D play a major role in determining the pace of progress for a particular business.
New products introduced on the market following successful R&D can generate more profits for companies.
R&D provides businesses with innovative technology. This has become one of the most important means to achieve success in today's competitive world.
A new product or a service is unique, original, and protected through intellectual property rights, such as patents.
It allows companies to prevent others from copying or stealing their invention.
Also, a patent provides its owner with the right to exclusively produce and sell a new product for a certain period.
Companies can take advantage of tax deductions that lower the cost base of R&D activities.
The research and development tax credit is a government-sponsored incentive for companies who choose to invest in research and development activities.
Tax benefits provide relief from tax or an enhancement of tax deductions.
Disadvantages of Research and Development
The cost involved with carrying out significant R&D projects can be high. This makes investing in this type of activity risky.
Small businesses might not have sufficient funds to carry out the necessary R&D activities that could benefit their operations.
Risk is another setback related to investing money in exploring new ideas.
It is tricky to determine what kind of outcome will result from a specific piece of research or a product's development until the project’s completion.
Additionally, companies might have to invest a lot of time and money before they see any positive results from their efforts.
The main disadvantage of R&D is that it can increase demand for goods with limited natural sources.
This could result in an artificial scarcity of products or services because most R&D projects are related to non-renewable resources like oil and gas.
For example, if R&D discovers new ways of producing renewable energy, demand for these products will go up while supplies remain constant. This will lead to higher prices and even shortages in some cases.
Why Companies Should Invest in R&D
R&D is a significant long-term financial investment for companies, but it can deliver many benefits.
Besides increasing the availability of new products to market, R&D enhances brand value, creates jobs, and raises national economic growth.
While it may be costly, R&D can generate revenue in different ways.
For instance, profits earned from the sales of products developed through R&D provide an incentive for companies to turn their efforts into viable commercial propositions.
When businesses manage to convert new ideas into successful products, they increase customer satisfaction. Also, they can simultaneously create room for further R&D initiatives.
R&D also provides businesses with valuable opportunities to expand on existing technology. They can also discover natural resources that could improve production, revenue, and customers' experience.
The Bottom Line
Research and development is an expensive but worthwhile undertaking.
The usefulness of this practice lies in the fact that research and development can lead to cost-efficient solutions for issues faced by companies. Also, it can pave the way to bring new products and services to market.
Additionally, R&D can improve a company's brand value, broaden its client base, and increase revenue. It will also create new jobs, generate tax benefits, and foster economic growth.
1. How can small businesses get involved in R&D projects?
Small businesses may hire outside consulting agencies to conduct a full assessment of their business and its needs. After this, companies can work with outside experts to identify the most promising R&D prospects that could make a big difference for their business in the short and long term.
2. What is an R&D tax credit?
An R&D tax credit is a government-sponsored incentive provided to businesses that choose to invest in activities related to research and development. Businesses that qualify can decrease or even eliminate taxes owed on income earned from these specific activities.
3. How do companies receive R&D tax credits?
Depending on existing regulations, companies may receive an R&D tax credit by filing a special type of tax return that provides information on the company's qualified activities. The government then determines how much money, if any, is owed back to the business after all expenses and incentives are taken into account.
4. Why do companies stress R&D efforts?
R&D takes place to expand the business and maximize potential revenue. By investing in it, businesses can develop new products and discover natural resources that could help decrease production costs and increase company productivity.
5. How do countries benefit from R&D?
Policymakers can increase tax revenues while simultaneously improving living standards by encouraging companies to pursue research and development projects that could prove profitable over time. Manufacturing gains are another major economic benefit of R&D initiatives. By encouraging companies to develop new technologies and discover natural resources, countries can maintain a strong industrial base while spurring economic growth with every discovery.