Research and development

Research and development (R&D or R+D), aka Research and Technical (or Technological) Development (RTD), is the set of innovative activities undertaken by corporations, wealthy industrialists, or governments in developing new services or products. R&D constitutes the first stage of development of a potential new service or the production process. Although R&D activities may differ across businesses, the primary goal of an R&D department is to develop new products and services to answer questions, solve problems, and drive innovation. R&D differs from the vast majority of corporate activities in that it is not intended to yield immediate profit, and generally carries greater risk and an uncertain return on investment. R&D is crucial for acquiring larger shares of the market through new products. R&D&I represents R&D with innovation.

Background

New product design and development is often a crucial factor in the survival of a company. In a global industrial landscape that is changing fast, firms must continually revise their design and range of products. This is necessary as well due to the fierce competition and the evolving preferences of consumers. Without an R&D program, a firm must rely on strategic alliances, acquisitions, and networks to tap into the innovations of others. In the context of commerce, "research and development" normally refers to future-oriented, longer-term activities in science or technology, using similar techniques to scientific research but directed toward desired outcomes with broad forecasts of commercial yield. In the United States, a typical ratio of research and development for an industrial company is about 3.5% of revenues; this measure is called "R&D intensity". A high technology company, such as a computer manufacturer, might spend 7% or a pharmaceutical companies such as Merck & Co. 14.1% or Novartis 15.1%. Anything over 15% is remarkable, and usually gains a reputation for being a high technology company such as engineering company Ericsson 24.9%, or biotech company Allergan, which tops the spending table with 43.4% investment. A system driven by marketing is one that puts the customer's needs first, and produces goods that are known to sell. Market research is carried out, which establishes the needs of consumers and the potential niche market of a new product. Research and development has been widely linked to productivity growth, though the relationship is complex and varies across industries. Investing in R&D is found to be positively associated with profitability, as well as higher productivity, as shown in studies conducted by the National Bureau of Economics. Research from 2000 has shown that firms with a persistent R&D strategy outperform those with an irregular or no R&D investment program. Measuring the effects of R&D can be difficult due to knowledge spillovers and changes in innovation. Statistics on organizations devoted to "R&D" may express the state of an industry, the degree of competition or the lure of progress. Data regarding patents are often used as a measure of the effects of R&D, however they do not capture all forms of innovation. Some other common measures include: budgets, and on rates of peer-reviewed publications. Bank ratios are one of the best measures, because they are continuously maintained, public and reflect risk.

Business R&D

Benefit by sector In general, it has been found that there is a positive correlation between the research and development and firm productivity across all sectors, but that this positive correlation is much stronger in high-tech firms than in low-tech firms. In research done by Francesco Crespi and Cristiano Antonelli, high-tech firms were found to have "virtuous" Matthew effects while low-tech firms experienced "vicious" Matthew effects, meaning that high-tech firms were awarded subsidies on merit while low-tech firms most often were given subsidies based on name recognition, even if not put to good use. While the strength of the correlation between R&D spending and productivity in low-tech industries is less than in high-tech industries, studies have been done showing non-trivial spillover effects to other parts of the marketplace by low-tech R&D. Even if low-tech firms do not produce a large breakthrough, they can still increase their "absorptive capacity," which improves their ability to glean knowledge from their surroundings and apply them to new endeavors.

Risks Research and development is difficult to manage, since the defining feature of research is that the researchers do not know in advance exactly how to accomplish the desired result. As a result, "higher R&D spending does not guarantee more creativity, higher profit or a greater market share". Research is the most risky financing area because both the development of an invention and its successful realization carries uncertainty including the profitability of the invention. Business R&D is risky for at least two reasons. The first source of risks comes from R&D nature, where an R&D project could fail without residual values. The second source of risks comes from takeover risks, which means R&D is appealing to bidders because they could gain technologies from acquisition targets. Therefore, firms may gain R&D profit that co-moves with takeover waves, causing risks to the company which engages in R&D activity. One way entrepreneurs can reduce these uncertainties or risks is to buy the license for a franchise, so that the know-how is already incorporated in the license. This is considered "external knowledge acquisition." However, as noted by Cassiman and Veugelers (2006), while buying external technology can reduce uncertainty, it is still often the most effective when used to complement, rather than completely replace, a firm's internal R&D activities.

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