What Is Research and Development (R&D)?

Research and development (R&D) refers to the activities companies undertake to innovate and introduce new products and services to use or sell, or to improve its existing line. It is generally the first stage in the development process. The goal is to add to the company's bottom line.

Companies across all sectors and industries undergo R&D activities. Corporations experience growth through these improvements and the development of new goods and services. Pharmaceuticals, semiconductor, and software/technology companies generally tend to spend the most on R&D.

In Europe, R&D is known as research and technical/technological development (RTD).

Understanding Research and Development (R&D)

The term research and development is widely linked to innovation—both in the corporate and governmental world, or the private and public sectors. R&D allows a company to stay on top of its competition. Without an R&D program, a company may not survive on its own, and may have to rely on other ways to innovate including acquisitions or partnerships. Through R&D, companies can design new products and improve their existing ones.

R&D is different from most activities performed by a corporation in the process of operation. The research and/or development is typically not performed with the expectation of immediate profit. Instead, it is focused on the long-term profitability for a company. They may lead to patents, copyrights, and trademarks.

Companies that set up and employ entire R&D departments commit substantial capital to the effort. They must estimate the risk-adjusted return on their R&D expenditures—which inevitably involve risk of capital—as no immediate payoff is experienced and the general return on investment (ROI) is somewhat uncertain. The level of capital risk increases as more is spent on R&D. Other companies may choose to outsource their R&D, for a variety of reasons including size and costs.

[Important: Many small and mid-sized businesses may choose to outsource their R&D efforts because they don't have the right staff in-house to meet their needs.]

Activities classified as R&D may differ from one company to the next. But standard primary models have been identified, and exist across different organizations and sectors.

Basic R&D Organizational Models

There are two basic R&D models. One model is a department staffed primarily by engineers who develop new products—a task that typically involves extensive research. There is no specific goal or application in mind with this model. Instead, it is research done for the sake of research.

The second model involves a department composed of industrial scientists or researchers, all of whom are tasked with applied research in technical, scientific, or industrial fields. This model facilitates the development of future products, or the improvement of current products and/or operating procedures.

Key Takeaways

  • Research and development are the activities companies undertake to innovate and introduce new products and services, or to improve their existing ones.
  • R&D allows a company to stay on top of its competition.
  • Companies in different sectors and industries conduct R&D—pharmaceuticals, semiconductor, and technology companies generally spend the most.

Basic vs. Applied Research

Basic research is aimed at fuller, more complete knowledge and understanding of the fundamental aspects of a concept or phenomenon. This is generally the first step in research and development. It gives a comprehensive understanding of information without directed applications toward products, policies or operational processes.

Applied research entails the activities used to gain knowledge with a specific goal in mind. That may be to determine and develop new products, policies or operational processes. While basic research is time-consuming, applied research is painstaking and more costly because of its detailed and complex nature.

R&D Accounting

R&D may be beneficial to a company's bottom line, but it does count as an expense. After all, companies spend a lot of money doing research and trying to develop new products and services. As such, these expenses must be reported for accounting purposes. Any basic and applied research conducted is reported as it is incurred. But development can be carried forward.

Who is Spending the Most on R&D?

Companies can spend billions of dollars on R&D in order to produce the newest, most sought-after products. According to the professional services firm, PriceWaterhouseCoopers, the following ten companies spent the most on innovation and improvements in 2018

  • Amazon: $22.6 billion
  • Alphabet, inc.: $16.2 billion
  • Volkswagen: $15.8 billion 
  • Samsung: $15.3 billion 
  • Intel: $13.1 billion 
  • Microsoft: $12.3 billion 
  • Apple: $11.6 billion
  • Roche: $10.8 billion
  • Johnson & Johnson: $10.6 billion
  • Merck: $10.2 billion