When it comes to the products and ideas that revolutionize and reshape our world, it can be tempting to imagine them springing from a singular moment of inspiration (think Isaac Newton and the apple).
The truth, however, is that in any industry, the most innovative and successful products are typically the result of years of study, experimentation, and hard work. That process is known as research and development—and whether you're running a high-tech Fortune 500 company or a small online store, it can be the first step to incredible success.
In this guide, you'll learn the definition of research and development, as well as the potential benefits and risks of investing in the practice.
What is research and development?
Research and development, also known as R&D, is the process by which a company works to generate new knowledge that it might use to create new technology, products, services, or systems that it will either use or sell.
Many people think of pharmaceutical and technology companies when they hear “R&D,” but other firms, including those that produce consumer products, invest time and resources into R&D as well. For example, a spaghetti sauce brand's many variations on the original product – “Chunky Garden,” “Four Cheese,” and “Tomato Basil Garlic”– are the results of extensive R&D.
Any business that creates and sells a product or service, whether it's software or spark plugs, invests in some level of R&D.
Basic vs. applied research
Research and development comes in two main types: basic, and applied.
Basic research (also known as fundamental research) is focused on improving our understanding of a particular problem or phenomenon through exploration of big questions. Some examples of basic research questions are:
- Why do mice get caught in traps?
- Why are some people allergic to gluten?
While basic research can certainly help a company acquire new knowledge, its focus on research for its own sake means that the financial benefits are uncertain. Consequently, this type of research and development is primarily performed by large corporations, universities, and government agencies.
Applied research is also done to acquire knowledge. But unlike basic research, it's done with a specific goal, use, or product in mind. Where basic research is theoretical, applied research is practical, with a focus on finding workable solutions for current problems. Some examples of applied research questions include:
- How can we build a better mousetrap?
- What combination of flours will produce the best gluten-free pie crust?
Why invest in research and development?
While the overarching goal of research and development is to add to a company's bottom line, companies undertake R&D for a variety of reasons.
- Create new and improved products: Whether you're starting a new company, or looking to expand your existing offerings, innovation research can help you meet customer demands for new and better products that solve their problems more quickly and easily.
- Increase business efficiency: R&D can help you gain knowledge about your production processes, business structure, and place in the market, providing insights that increase productivity by eliminating time-consuming inefficiencies and allocating resources to the most impactful projects.
- Reduce costs: Profits aren't the only way that research and development can pay off. In fact, many companies focus their R&D on improving existing technologies and processes for internal use, reducing the overall cost of bringing your products to market.
- Remain competitive: Research and development is a great way to stay ahead of the competition. By investing in emerging technologies that improve your products, you can gain a competitive edge over even the most established firms.
- Secure investment: Even if your research efforts aren't immediately profitable, they may point to future innovations or developments that investors are excited to support.
Who handles research and development?
Often, research and development is handled in house by an internal department in a company, but it can also be outsourced to a specialist or a university. Large multinational companies might do all three, and some of the outsourced work might be done in another country so that the company leverages both the talent and local market knowledge there.
Outsourced R&D is especially appealing to the small business owner who has a new product concept but lacks the design or engineering staff needed to create and test options. Solopreneurs who offer software as a service are an example on the smallest scale, as they sometimes outsource the R&D and resulting software development.
R&D and accounting
There are no guarantees when it comes to research and development, and it's very unlikely to lead to an immediate profit. Often, a company will spend a large amount of money in search of a better method, material, or medication, and never see a return on the investment. In this sense R&D is not an asset: it's a business expense. For that reason, general accounting standards and practices dictate that most (but not all) costs associated with research and development be charged to expense as incurred.
That said, businesses can mitigate some of the impacts of research and development by leveraging federal tax breaks and deductions focused on promoting R&D.