Research and development (R&D) is the part of a company's operations that seeks knowledge to develop, design, and enhance its products, services, technologies, or processes. Along with creating new products and adding features to old ones, investing in research and development connects various parts of a company's strategy and business plan.
According to the latest Business Enterprise Research and Development survey by the National Center for Science and Engineering and the U.S. Census Bureau, businesses spent $32.5 billion to support their R&D activities in 2020.
Here are some reasons your business should invest in research and development.
Key Takeaways
- Research and development (R&D) is an essential driver of economic growth as it spurs innovation, invention, and progress.
- R&D spending can lead to breakthroughs that can drive profits and well-being for consumers.
- Today, R&D is present in nearly every business sector as companies jockey for position in their respective markets.
- Smaller firms engaged in R&D can offset some of these costs and attract investors thanks to a federal tax break.
Investing in Research and Development (R&D)
The Internal Revenue Service's definition of research and development is investigative activities that a person or business chooses to do with the desired result of a discovery that will create an entirely new product, product line, or service.
However, the activities don't only need to be for disovering new products or services—this is only for tax purposes.
R&D isn’t just about creating new products; it can be used to strengthen an existing product or service with additional features.
Research refers to any new science or thinking that will result in a new product or new features for an existing product. Research can be broken down into either basic research or applied research. Basic research seeks to delve into scientific principles from an academic standpoint, while applied research aims to use that basic research in a real-world setting.
The development portion refers to the actual application of the new science or thinking so that a new or increasingly better product or service can begin to take shape.
Research and development is essentially the first step in developing a new product, but product development is not exclusively research and development. An offshoot of R&D, product development can refer to the entire product life cycle, from conception to sale to renovation to retirement.
R&D Offers Productivity, Product Differentiation
Firms gain a competitive advantage by performing in some way that their rivals 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 outpace competitors.
R&D often leads to a new type of product or service—for example, without research and development, cell phones or other mobile devices would never have been created. The internet, and even how people live today, would be completely different if businesses had not conducted R&D in the past.
Research results give businesses a means to find issues people have and ways to address them, and development allows companies to find unique and different ways to fix the problems.
This leads to many different product and service variations, which gives consumers choices and keeps the markets competitive. Some examples of companies that carry out R&D activities are auto manufacturers, software creators, cutting-edge tech companies, and pharmaceutical firms.
The R&D Tax Credit
In 1981, the IRS started offering tax breaks for companies to spend money and hire employees for research and development. Qualifying companies include startups and other small ventures 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 online companies, but they can be seen wherever there is a lot of incentive to innovate.
Research and development can help your ideas or business become more attractive to investors and other companies looking to expand.
Advertising and Marketing R&D Benefits
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.
R&D strategies let companies create highly effective marketing strategies around releasing a new or existing product with new features. A company can create marketing campaigns to match innovative products and market participation.
What Are the Reasons for R&D?
Research and development keep your business competitive. Without R&D, you risk losing your competitive advantage and falling behind other companies researching and developing new products in your industry.
Why Is R&D Important for Startups?
R&D is essential because it helps you keep your business momentum going. New products and services help you attract more customers, make sales, and give you something to talk about with your investors.
What Factors are Essential in Successful R&D?
Successful research and development depend on many factors, but the most important is a strong interest from your customer base and investors. If you spend money and time researching and developing something no one wants, it's being wasted.
The Bottom Line
Increased market participation, cost management benefits, advancements in marketing abilities, and trend-matching are all reasons companies invest in R&D. R&D can help a company follow or stay ahead of market trends and keep the company relevant.
Although resources must be allocated to R&D, the innovations gained through this research can actually work to reduce costs through more efficient production processes or more efficient products. R&D efforts can also reduce corporate income tax, thanks to the deductions and credits they generate.
