Business encyclopedia

Learn everything there is to know about running a business

Research and Development (R&D)

What is Research and Development?

Research and development – R&D – is the process by which a company works to obtain new knowledge that it might use to create new technology, products, services, or systems that it will either use or sell. The goal most often is to add to the company’s bottom line.

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.   

It takes place in companies of all sizes. 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 or Applied

Research is usually basic or applied. Basic research helps the company acquire new knowledge, but doesn’t have any specific application or use in mind. Think of it as research for the sake of research.  

While applied research is also done to acquire knowledge, it’s done with a specific goal, use, or product in mind – such as how to build a better mousetrap.  

Who Does It

R&D often takes place in 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

Unlike death and taxes, there are no guarantees with hoped-for R&D outcomes, so a company might spend a large amount of money in the search for a faster or better way to do something or a medication that’s better than the one they’re already manufacturing, and never get a return on the investment. R&D is not an asset, then. It’s an expense.

For that reason, general accounting standards and practices dictate that most (but not all) costs associated with R&D be charged to expense as incurred.

You may also be interested in: