Research and Development (R&D) : Meaning, Objectives, Advantages and Disadvantages

What is Research and Development?

Research and Development (R&D) is a systematic investigation that can bring advancements to the company’s existing product line. It does this by launching a new product line or making enhancements to the one that already exists. Nowadays, various industries and areas apply Research and Development (R&D). Usually, the industries with the highest amount of R&D investment include semiconductors, software, technology, and medicines. Businesses in industries with a high share of intangible assets usually invest significantly in R&D. For many teams and organizations, research and development (R&D) is a crucial activity because it helps in learning and organizational growth. Teams can experiment and find more efficient ways to achieve company objectives, including raising overall revenue or improving customer satisfaction through research & development. It helps businesses to create new goods or processes and helps in performing work efficiently.

Geeky Takeaways:

• Companies that use research and development to create and introduce new products and services, as well as to improve their existing offerings.
• R&D enables a business to meet growing market demands and remain ahead of the competition.
• The income statement and balance sheet of a business can be greatly influenced by how expenditures on research and development are treated in accounting.
• While applied research is more focused on studying a more specific area, research and development (R&D) usually involves a broad approach to exploratory advancements.

Objectives of Research and Development

• To mobilize funds from various funding bodies for organizing FDP/Seminar/Workshop etc.
• To obtain an extensive number of patents through research in all of the various fields and recently developing areas of engineering.
• To arrange funds from well-known funding agencies, each department takes an interest in presenting their proposal regularly.
• To encourage academic faculty as well as students to submit their work to recommended journals.
• To motivate students to display their work in famous exhibitions.
• To sign Memorandums of Understanding (MOUs) with industries and institutes for projects and training.
• To sponsor academic members to participate in conferences, seminars, workshops, etc.
• To undertake studies that can support human resource development, as they are capable of implementing major roles in society.
• To establish faculty and student training schools in the summer and winter.
• To delegate the institutes as resource persons and jurors to faculty members for conducting R&D-related seminars, conferences, workshops, and project expos.
• To employ criteria for ensuring high-quality research.

Advantages of Research and Development

1. Enhanced Employee Motivation: Research and Development may encourage a commitment to the duties of the team and serve as motivation for the employees. Generally, employee productivity and happiness at work could increase if they are interested in the potential new feature or product that they are developing. A team that promotes innovation can also find that its employees feel free to express and experiment with their ideas. A team that communicates openly may develop new ideas faster and provide more customer-beneficial goods and services.

2. An Increase in Customer Satisfaction: Teams may give customers more of what they want or need when they use research to create new features, services, and products. A wider range of goods and services can increase customer satisfaction and loyalty. When an organization has happier and more committed customers, it may increase revenue and encourage its department to research and develop even more valuable products for its customers. This begins with creating a beneficial cycle of feedback that can facilitate the easier growth and development of the company.

3. Marketing Assistance: The marketing department can benefit from additional research and development resources that can help sell and advertise a company more effectively. With the research and development department producing new products or features, the marketing department is capable of developing appealing new advertising campaigns to draw in new customers or regenerate the interest of existing ones. Furthermore, the marketing department’s recommendations can also provide direction and focus to the research department.  It is so because marketers are better at knowing what consumers want from their products than researchers are, so they can direct studies and help in the development of new products.

4. Remain Competitive: Research and Development is a great approach to remain ahead of the competition. This can help in obtaining a competitive advantage over the most well-established companies by investing in cutting-edge technology that improves their products and services. Research and Development may also be able to help you identify methods for the team to reduce its manufacturing or production costs. This reduced production cost allows businesses to allocate more funds to other departments within the team, like marketing, which can ultimately create a competitive edge.

5. Tax Credits: The Internal Revenue Service (IRS) started providing tax exemptions and other incentives to businesses in 1981 in exchange for appointing additional employees for R&D. The company needs to be a small business or startup to be eligible for the tax advantage, but it can help them reduce their overall costs and taxes. Teams can apply for Research and Development grants from various foundations, companies, and organizations to help them raise money for their research department if they aren’t eligible for the tax benefit.

6. Mergers and Buyouts: Some teams allocate all of their funds and resources to Research and Development to present innovative concepts to already-existing companies. If a small team has an innovative concept but lacks the finances or resources to put it into action, then selling the idea to a larger company can help them raise funds for their next project. Sometimes, larger businesses may find the idea so appealing that they make an actual offer to purchase the company and merge with it. In this way, the smaller group may continue coming up with appealing new ideas that work for them both.

Disadvantages of Research and Development

1. Price: The implementation of large-scale Research and Development programs can sometimes be expensive. Due to this reason, the risk of investing in this kind of activity increases. It is also possible that small businesses do not have access to the resources that are required to conduct the essential R&D that could improve their operations.

2. Risk: Another disadvantage of investing funds in the exploration of ideas is risk. It is difficult to predict what kind of outcomes a certain research project or product development results until the project is finished. Furthermore, it can take a significant amount of time and money for businesses to experience any return on their investment.

3. Artificial  Outcomes: Another disadvantage of R&D is that it may lead to a rise in the demand for goods with limited natural resources. Since the majority of R&D initiatives include non-renewable resources like oil and gas, this could lead to an artificial scarcity of goods or services. For instance, demand for these goods will increase while supply remains the same if R&D finds new methods of generating renewable energy. This will result in higher pricing, as well as shortages in some circumstances.

4. Shifting Market Trends: Companies usually suffer the risk of being at the mercy of shifting market trends because it requires time to go from concept to product. Therefore, something that they earlier believed would be a huge seller can be on the market too late and not sell out as soon as it’s ready.

Why is Research and Development Important?

1. Innovation: The level of advancement for a particular business is mostly determined by the inventions that come from research and development.  R&D leads to new products being launched in the market, which can help businesses make more profits. R&D helps businesses develop innovative technology. This has emerged as one of the most crucial strategies for success in today’s competitive environment.

2. Intellectual Property: A newly developed product or service is unique, original, and secured by Intellectual Property Rights (IPR) like Patents. It allows businesses to prevent others from stealing or replicating their inventions. In addition, a patent gives its owner the exclusive right to develop and market a new product for a certain period.

3. Tax Advantages: The government provides tax deductions to businesses to promote research and development. These tax deductions help in reducing the cost of R&D. One such government-sponsored scheme for businesses that decide to invest in R&D is the research and development tax credit. Benefits from taxes include reduced taxes or increased tax deductions.

4. Expanding Talent Pool: Since Research and Development is an important component of innovation, employees involved in it need to possess a higher level of expertise. This enables businesses to hire more employees with specialized skill sets.

5. Promotes Productivity: R&D benefits consumers by providing them with greater choices and higher-quality products and services. Therefore, businesses can rely on customers to stick to their brands. It also promotes economic growth and productivity.

Who Handles Research and Development?

• Research and Development is often managed internally by a company’s internal department, but it can also be outsourced to a university or a specialist.
• Large international businesses may perform all three, with some of the outsourced work taking place in another country so that businesses can make use of both talent and local market knowledge.
• Small business owners who have an innovative product idea but lack the design or technical resources necessary to develop and test solutions can consider outsourcing research and development for better results.

Types of Research and Development

There are three types of Research and Development, which are as follows:

1. Basic Research: Primary and unique research that is conducted without any commercial motives in mind is known as Basic Research. The objectives of fundamental research are to investigate a certain topic or phenomenon to gain knowledge about it and develop strategies for handling it. The initial stages of creating a new product or technique are provided by basic research. It happens in both business and academic environments.

2. Applied Research: Transforming an idea into a good or service that is prepared for release into the market after basic research is completed is known as Applied Research. The purpose of this type of R&D is to make the invention marketable and cost-effective for commercial application. For this method to be effective, Applied Research must follow the original examination, especially if the findings from fundamental research are complex and difficult to interpret.

3. Developmental Research: The type of research that aims to offer techniques and equipment to improve the manufacturing of products, in contrast to applied research, which focuses on getting products ready for the market is known as Development Research. The purpose of Developmental Research is to solve consumer concerns by making their tasks easier.

Example of Research and Development

During COVID-19, pharmaceutical companies were testing a new drug, which can be an example of Research and Development (R&D). The process started with first researching the drug to see whether the drug is effective and safe for the general public. During the research trials, the drug was found effective and safe, the company developed a plan to mass-produce and market the drug. In this way, the vaccine was introduced in the market.

Research and Development Accounting

When it comes to Research and Development, there are no guarantees and it’s very difficult to earn a return immediately. In some cases, a business will invest a significant sum of money in search of a better process, material, or medication and never get a return on that investment. R&D is a business expense rather than an asset in this sense. As a result, general accounting standards and practices require that the majority (but not all) costs related to Research and Development be charged to expense as incurred. However, by making use of federal tax benefits and deductions intended to support Research and Development (R&D), businesses may reduce some of the effects of this practice.

Due to their short-term nature, these costs are frequently recorded on the income statement for accounting purposes. R&D expenses are capitalized and shown on the balance sheet under specific circumstances. Examples may include, but are not limited to:

• There are many alternate future uses for materials, fixed assets, and other assets, each having an estimated value and useful life.
• Software with a useful life that extends beyond a single R&D project and can be modified or implemented elsewhere in the company.
• Overhead or indirect expenses that are divided among projects.
• R&D has intangible value that is acquired from a third party. It is possible to register the intangible asset as a separate asset on the balance sheet.

Difference Between Research and Development and Applied Research

Basis	Research and Development	Applied Research
Objective	The objective of Basic Research is to develop a deeper, more comprehensive understanding of the underlying principles behind an idea or phenomenon. In most cases, R&D starts with this understanding. These activities furnish a basis for information without specific implications for products, regulations, or operational procedures.	The actions performed to acquire knowledge with a particular objective in mind are called Applied Research. The activities may include determining and developing new products, policies, or operational processes
Nature	Basic Research takes time, but it is not as in complex as Applied Research.	Applied research is detailed and complex in nature. It also requires more time and funds.

Types of Activities under Research and Development

There are three types of Research and Development activity, which are as follows:

1. Basic Research: This type of research is conducted without any commercial motives in mind and is known as Basic Research. This type of research aims to investigate a certain topic or phenomenon to gain knowledge about it and develop strategies for handling it.

2. Applied Research: This type of research includes transforming an idea into a good or service that is prepared for release into the market after basic research is completed. The purpose of this type of R&D is to make the invention marketable and cost-effective for commercial application;

3. Developmental Research: The type of research that aims to offer techniques and equipment to improve the manufacturing of products, in contrast to applied research, which focuses on getting products ready for the market is known as Development Research.

Research and Development in Business

Businesses can apply different organizational structures to implement various R&D plans, and they will approach R&D in different ways. The application of research and development leads to significant differences among businesses internally,  it has an impact on the project as a whole. Some companies will outsource their R&D because they lack the resources to conduct it internally, depending on others to promote innovation.  Some companies have departments entirely devoted to Research and Development, while others decide to contract out their R&D.

R&D is a difficult task that usually causes challenges for every company. Many R&D leaders find it difficult to reduce development times in addition to improving their future planning and roadmapping. A common yet challenging objective for several companies is to create an innovative corporate culture through Research and Development (R&D).

How to Develop a Research and Development Strategy?

Companies that perform comprehensive research and development assessments are better able to formulate effective R&D strategies. It includes analyzing market trends, observing prospective growth regions, and assessing how well new goods and services could reach unexplored markets or customers. Businesses should also think about how well they can execute innovation now and, if needed, explore strategies to improve this capability.

This assessment should guide where to direct investments to maximize opportunities while minimizing risk and expense. In addition, companies consider how they may establish customer feedback to make sure their products satisfy market demands. Businesses that design an R&D strategy with all these factors in mind will be strategically placed to invest in technologies that create value for consumers and maximize profitability.

List of Research and Development Spending by Companies

S No.	List of Companies	R & D Spend
1	Amazon	$ 73.2 B
2	Alphabet	$ 39.5 B
3	Meta	$ 35.3 B
4	Apple	$ 27.7 B
5	Microsoft	$ 26.6 B
6	Nvidia	$ 7.3 B
7	Broadcom	$ 4.9 B
8	ASML	$ 3.3 B
9	Tesla	$ 3.1 B
10	Pepsico	$ 0.8 B

Frequently Asked Questions (FAQs)

1. How can R&D projects involve small businesses?

Answer:

It may hire outside consulting firms to carry out evaluation of their company and its requirements. Businesses collaborate with outside experts to determine which R&D opportunities carry the greatest potential for both short- and long-term impact on the business.

2. How are R&D tax credits granted to businesses?

Answer:

Eligibility for an R&D tax credit is based on current regulations if they file a specific tax return that details their qualified activities. When all costs and incentives have been considered, the government decides how much money, if any, is owed back to the company.

3. Why do businesses focus on their R&D efforts?

Answer:

R&D is conducted to grow the company and increase revenue possibilities. Businesses that invest in it can find natural resources and create new products that could lower production costs and improve productivity.

4. How can R&D help countries?

Answer:

Policymakers can encourage businesses to pursue projects in the field of Research and Development that have the potential to be profitable in the long run, which will improve tax collections while also raising living standards.

5. Why is Research and Development Important?

Answer:

R&D enables businesses to create products that are difficult to replicate for competitors. Efforts to conduct research and development can also result in higher efficiency, which improves profits and gives an advantage over competitors.