A:

Some advantages of research and development are clear, such as the possibility for increased productivity or new product lines. The Internal Revenue Service offers an R&D tax credit for businesses. Some kinds of investors look for firms with aggressive R&D efforts. It's also not uncommon for small business owners to make a lot of money from R&D by being bought out by a larger firm in the industry.

Productivity and Product Differentiation

Firms gain a competitive advantage by performing in some way that their competition cannot easily replicate. If R&D efforts lead to an improved type of business process – cutting marginal costs or increasing marginal productivity – it is easier to realize a competitive advantage.

R&D might also lead to a new type of product or service. According to the Small Business Administration, this is most common in industries such as industrial machinery, trucks and tractors, computing technology and manufacturing.

The R&D Tax Credit

Starting in 1981, the IRS started offering tax breaks for companies to spend money and hire employees for the purpose of research and development.

Qualifying companies include startups and other small companies with qualified research expenses. Such expenses can be used to offset tax liabilities, along with an impressive 20-year carry-forward provision for the credit.

Buyouts and Mergers

Many entrepreneurs and small businesses have made a large sum of money in a short time by selling good ideas to established firms with many resources. Buyouts are particularly common with Internet companies, but they can be seen wherever there is a lot of incentive to innovate.

Advertising

Advertising is full of claims about revolutionary new techniques or never-before-seen products and technologies. Consumers demand new and improved products, sometimes simply because they are new. R&D departments can act as advertising wings in the right market.

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