Loading the player...

What are 'Research And Development (R&D) Expenses'

Research and development (R&D) describes activity or expense associated with the research and development of a company's goods or services. R&D expenses are a type of operating expense and can be deducted as such on a business tax return. This type of expense is incurred in the process of finding and creating new products or services.

BREAKING DOWN 'Research And Development (R&D) Expenses'

R&D is a type of systematic activity conducted by a company, which combines basic and applied research in an attempt to discover solutions to problems, or to create or update goods and services. The act of a company conducting its own R&D often results in the ownership of intellectual property in the form of patents or copyrights.

An important component of a company's R&D is its R&D expenses. These expenses can be relatively minor, or they can easily run into billions of dollars for large corporations. R&D expenses are usually the highest for industrial, technological, health care and pharmaceutical firms. Some companies reinvest a significant portion of their profits back into R&D, as is the case with technology companies, since they see it as an investment in their continued growth.

An Example of R&D

Tech companies rely heavily on R&D capabilities. In an environment with constant change, it's integral for a company to remain on the bleeding edge of innovation. Companies such as Facebook, for example, are investing heavily in the research development of such products as virtual reality and predictive chat bots. These endeavors allow Facebook to diversify its business and find new areas of opportunistic growth as technology continues to evolve.

On this note, large companies have also been able to conduct R&D through acquisition. Facebook's acquisition of Oculus Rift is a perfect example of this. The company already had the internal resources necessary to build out a virtual reality division, but by acquiring an existing virtual reality company, it was able to expedite the development time.

Reasons to Conduct R&D

Businesses conduct R&D for many reasons, the first and foremost being new product research and development. Before any new product is released into the marketplace, it goes through a significant research phase and development phase. Research is conducted into a product's market opportunity, cost and production timeline. After adequate research, the new product enters the development phase, where it is actually created from the concept laid out during the research phase.

Some companies use R&D to update existing products or conduct quality checks. When this happens, a business evaluates a product to ensure it's still adequate, and additional improvement ideas are posed. If the improvements are cost-effective, they're implemented during the development phase.

RELATED TERMS
  1. Research And Development - R&D

    Investigative activities that a business chooses to conduct with ...
  2. Price/Growth Flow

    A measure formulated to identify companies that are producing ...
  3. Return On Research Capital - RORC

    A calculation used to assess the revenue a company brings in ...
  4. Price-To-Research Ratio - PRR

    A measure of the relationship between a company's market capitalization ...
  5. Price-To-Innovation-Adjusted Earnings

    A variation of the price-to-earnings ratio (P/E ratio) that takes ...
  6. Return On Innovation Investment

    A performance measure used to evaluate the effectiveness of a ...
Related Articles
  1. Small Business

    Understanding Research and Development (R&D) Expenses

    Research and development expenses are the expenses associated with the research and development of a company’s goods or services.
  2. Investing

    Buying Into Corporate Research & Development (R&D)

    Investors take note: companies that cut research and development are in danger of saving today but losing big tomorrow.
  3. Investing

    R&D Spending And Profitability: What's The Link?

    Return on research capital (RORC), can help investors measure how much profit R&D spending actually generates.
  4. Investing

    Earnings Sustainability: The Key To Your Investing Future

    Learn how to analyze earnings sustainability - an important part of making sound investments.
  5. Insurance

    How To Do Qualitative Analysis On Biotech Companies

    These analytical methods will help you size up a biotech company and make a winning investment.
  6. Investing

    Which Is Better: Dominance Or Innovation?

    Find out how to assess and evaluate both these values in the market and your portfolio.
  7. Investing

    Catching Comeback Stocks For Clients

    We'll give you the clues you need to assess which stocks can make a turnaround.
  8. Trading

    Why America's Advantage Is Innovation (CHKP, GHDX)

    Learn about the reasons why America has an advantage in regards to innovation. Discover three key innovation themes that are likely to experience growth.
  9. Investing

    Pfizer's 3 Key Financial Ratios (PFE)

    Learn about three important financial ratios that help understand Pfizer, Inc. business and analyze the company's financial statements.
  10. Small Business

    Pharma Patent Trolls: Cheap Drugs At A Steep Price

    Though patent trolls can help patients achieve cheaper medication in the short-term, everyone pays for it in the long term.
RELATED FAQS
  1. Why should companies invest in research and development?

    Understand why companies should invest in research and development. Learn the specific ways R&D can keep a company relevant. Read Answer >>
  2. What are the benefits of research and development for a company?

    Learn about the many benefits of research and development (R&D) efforts for companies in competitive markets, including many ... Read Answer >>
  3. How much of a drug company's spending is allocated to research and development on ...

    Explore the level of spending on research and development in the pharmaceutical sector, and how it compares to R&D spending ... Read Answer >>
  4. What country spends the most on research and development?

    Discover which country spends the most on research and development, in both dollar terms and as a percentage of gross domestic ... Read Answer >>
  5. Can I get a tax credit from conducting research and development?

    Understand if a company can receive a tax credit from conducting research and development. Learn about the alternative simplified ... Read Answer >>
  6. What is the relationship between research and development and innovation?

    Understand what research and development is and why a company or person would want to conduct it. Learn about how it can ... Read Answer >>
Hot Definitions
  1. Federal Direct Loan Program

    A program that provides low-interest loans to postsecondary students and their parents. The William D. Ford Federal Direct ...
  2. Cash Flow

    The net amount of cash and cash-equivalents moving into and out of a business. Positive cash flow indicates that a company's ...
  3. PLUS Loan

    A low-cost student loan offered to parents of students currently enrolled in post-secondary education. With a PLUS Loan, ...
  4. Graduate Record Examination - GRE

    A standardized exam used to measure one's aptitude for abstract thinking in the areas of analytical writing, mathematics ...
  5. Graduate Management Admission Test - GMAT

    A standardized test intended to measure a test taker's aptitude in mathematics and the English language. The GMAT is most ...
  6. Magna Cum Laude

    An academic level of distinction used by educational institutions to signify an academic degree which was received "with ...
Trading Center