Investor's wiki

Research and Development (R&D)

Research and Development (R&D)

What Is Research and Development (R&D)?

Research and development (R&D) includes activities that companies attempt to innovate and introduce new products and services. It is in many cases the main stage in the development cycle. The goal is commonly to take new products and services to market and add to the company's primary concern.

Understanding Research and Development (R&D)

The term R&D is widely linked to innovation both in the corporate and government sectors. Research and development permits a company to remain ahead of its competition. Without a R&D program, a company may not make due all alone and may need to depend on alternate ways of innovating like engaging in mergers and acquisitions (M&A) or partnerships. Through R&D, companies can design new products and work on their existing offerings.

Research and development is separate from most operational activities performed by a corporation. The research and additionally development is normally not performed with the expectation of immediate profit. Instead, it is expected to add to the long-term profitability of a company. Research and development might lead to licenses, copyrights, and brand names as revelations are made and products made.

Companies that set up and utilize whole R&D departments commit substantial capital to the work. They must estimate the risk-adjusted return on their R&D consumptions โ€” which inevitably involves risk of capital โ€” on the grounds that there is no immediate payoff, and the return on investment (ROI) is uncertain. As more money is invested in R&D, the level of capital risk increases. Different companies might decide to re-appropriate their R&D for various reasons including size and cost.

Companies across all sectors and industries go through R&D activities. Corporations experience growth through these improvements and the development of new goods and services. Pharmaceuticals, semiconductors, and software/technology companies will more often than not spend the most on R&D. In Europe, R&D is known as research and technical or mechanical development (RTD).

Numerous small and average sized businesses might decide to rethink their R&D efforts since they don't have the right staff in-house to address their issues.

Special Considerations

Research and development Accounting

Research and development might be beneficial to a company's main concern, yet it is considered a expense. All things considered, companies spend substantial sums on research and trying to foster new products and services. Thusly, these expenses are frequently reported for accounting on the income statement and don't carry long-term value.

There are certain circumstances where R&D costs are capitalized and reported on the balance sheet. A few models include yet are not limited to:

  • Materials, fixed assets, or different assets have alternative future purposes with a respectable value and helpful life.
  • Software that can be changed over or applied somewhere else in the company to have a valuable life past a specific single R&D project.
  • Indirect costs or overhead expenses allocated between projects.
  • Research and development purchased from an outsider that is joined by intangible value. That intangible asset might be recorded as a separate balance sheet asset.

Who Spends the Most on R&D?

Companies spend billions of dollars on R&D to deliver the freshest, most sought-after products. According to public company filings, these companies incurred the highest research and development spend in 2020:

  • Amazon: $42.7 billion
  • Alphabet, Inc.: $27.6 billion
  • Huawei: $22.0 billion
  • Microsoft: $19.3 billion
  • Apple: $18.8 billion
  • Samsung: $18.8 billion
  • Facebook: $18.5 billion

$42.7 billion of research and development costs later, Amazon was allowed 2,244 new licenses in 2020. Their licenses included advancements in artificial intelligence, machine learning, and cloud computing.

Types of Research and Development

One R&D model is a department staffed basically by engineers who grow new products โ€” a task that regularly involves broad research. There is no specific goal or application in mind with this model. Instead, the research is finished for research.

The subsequent model involves a department made out of industrial researchers or researchers, who are all tasked with applied research in technical, logical, or industrial fields. This model works with the development of future products or the improvement of current products and additionally operating procedures.

There are additionally business incubators and gas pedals, where corporations invest in startups and give funding assistance and guidance to entrepreneurs in the hope that innovations will result that they can use to their benefit.

Likewise, M&As and partnerships are forms of R&D as companies join powers to exploit other companies' institutional knowledge and ability.

Research and development versus Applied Research

Essential research is focused on a more full, more complete understanding of the fundamental parts of a concept or phenomenon. This understanding is generally the most important phase in R&D. These activities give a basis of information without directed applications toward products, policies, or operational processes.

Applied research involves the activities used to gain knowledge considering a specific goal. The activities might be to determine and foster new products, policies, or operational processes. While fundamental research is tedious, applied research is painstaking and more costly on account of its definite and complex nature.


  • Research and development permits a company to remain ahead of its competition by catering to new needs or needs in the market.
  • Companies in various sectors and industries conduct R&D โ€” pharmaceuticals, semiconductors, and technology companies generally spend the most.
  • Research and development is in many cases a broad approach to exploratory advancement, while applied research is more geared towards researching a more narrow scope.
  • The accounting for treatment for R&D costs can substantially impact a company's income statement and balance sheet.
  • Research and development addresses the activities companies attempt to innovate and introduce new products and services or to work on their existing offerings.


What Types of Activities Can Be Found in Research and Development?

Research and development activities center around the innovation of new products or services in a company. Among the primary reasons for R&D activities is for a company to remain competitive as it produces products that advance and hoist its current product line. Since R&D regularly operates on a longer-term horizon, its activities are not anticipated to generate immediate returns. Nonetheless, on schedule, R&D projects might lead to licenses, brand names, or advancement disclosures with lasting benefits to the company.

What Is an Example of Research and Development?

Consider the case of Alphabet, which has allocated more than $16 billion every year to R&D in 2018. Under its R&D arm X, the moonshot factory, it has developed Waymo self-driving cars. In the mean time, Amazon has spent even more on R&D projects, with key developments on cloud computing and its clerk less store Amazon Go. Simultaneously, R&D can adopt the strategy of a merger and acquisition, where a company will leverage the ability and intel of one more company to make a competitive edge. The equivalent can be said with company investment in gas pedals and incubators, whose developments it could later leverage.

Why Is Research and Development Important?

Given the quick rate of innovative advancement, R&D is important for companies to remain competitive. Specifically, R&D permits companies to make products that are challenging for their rivals to imitate. In the mean time, R&D efforts can lead to further developed productivity that helps increase margins, further creating an edge in outpacing contenders. According to a broader viewpoint, R&D can permit a company to remain ahead of the curve, anticipating customer requests or trends.