Research and Development - R&D

What is 'Research and Development - R&D'

Research and development (R&D) refers to the work a business conducts toward the innovation, introduction and improvement of its products and procedures. Simply, it is a series of investigative activities to improve existing products and procedures or to lead to the development of new products and procedures.

Consumer goods companies across all sectors and industries utilize R&D to improve on product lines, and corporations experience growth through these improvements and through the development of new goods and services. In general, pharmaceuticals, semiconductor and software/technology companies tend to spend the most on R&D.

BREAKING DOWN 'Research and Development - R&D'

The term "research and development" is widely linked to the concept of corporate or governmental innovation. Known as research and technical/technological development (RTD) in Europe, activities that are classified as R&D differ from one company to the next, but standard primary models have been identified.

Basic Research and Development Organizational Setups

There are two basic R&D structures that have emerged in companies throughout the commerce spectrum. One R&D model is a department that is staffed primarily by engineers who develop new products, a task that typically involves extensive research. The other model involves a department composed of industrial scientists or researchers, all tasked with applied research in technical, scientific or industrial fields, which is aimed at the facilitation of the development of future products or the improvement of current products and/or operating procedures.

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 or goal of immediate profit. Instead, it is focused on long-term profitability for a company. Companies that employ entire departments devoted to R&D 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.

Basic vs. Applied Research

Basic research is systematic study aiming at fuller, more complete knowledge and understanding of the fundamental aspects of a concept or a phenomenon. Basic research is generally the first step in research and development, performed to give a comprehensive understanding of information without directed applications toward products, policies or operational processes.

Applied research is the systematic study and gleaning of knowledge and understanding to apply to determining and developing products, policies or operational processes. While basic research is time-consuming, applied research is painstaking and more costly due to its detailed and complex nature.

Who's 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 2015: 

• Volkswagen: $15.3 billion
• Samsung: $14.1 billion
• Intel: $11.5 billion 
• Microsoft: $11.4 billion 
• Roche: $10.8 billion 
• Google: $9.8 billion 
• Amazon: $9.3 billion
• Toyota: $9.2 billion
• Novartis: $9.1 billion
• Johnson & Johnson: $8.5 billion