Research and Development (R&D)

I have been looking into the world of R&D, and the role it plays in our economy. This post like many others can expand overtime as it is a rather big topic, but I shall begin by finding some of the basic definitions...

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What is R&D?

R&D refers to specific activities within a business. R&D activities differ from company to company, but there are perhaps two primary focuses: 

1. To develop new products; 

2. To discover and create new knowledge about scientific and technological topics for the purpose of uncovering and enabling development of valuable new products, processes, and services.

Why R&D?

R&D can involve some uncertainty as to the return on investment (ROI); researchers do not know in advance exactly how to accomplish the desired result. Higher R&D spending does not guarantee "more creativity, higher profit or a greater market share". However, new product design and development is a crucial factor in the survival of a company. This is necessary due to continuous technology change and development as well as other competitors and the changing preference of customers. Without an R&D program, a firm must rely on *strategic alliances, acquisitions, and networks to tap into the innovations of others (as seen in some developing countries that does not have a strong tradition in R&D).

 

Where?

In general, R&D activities are conducted by specialized units or centers belonging to a company, or can be out-sourced to a contract research organization, universities, or state agencies.

How much?

In the U.S, a typical ratio of research and development for an industrial company is about 3.5% of revenues. A high technology company such as a computer manufacturer might spend 7%.

Anything over 15% is remarkable and usually gains a reputation for being a high technology company. For example:

Allergan (43.4%) - a biotech company

Merck & Co (14.1%) - pharmaceutical

Novartis (15.1%)

Ericsson (24.9%) - Engineering 

Generally such firms prosper in markets whose customers have extreme needs (medicine, scientific instruments, safety-critical mechanisms (aircraft) or high technology military armaments). The extreme needs justify the high risk of failure and consequently high gross margins.

Present-day R&D is core part of the modern business world. Major decisions in firms are made on base of research and development.

What the market needs 

At the end of the day, companies provide products or services, one should bear in mind what the market needs (market research) and develop products and services accordingly.

*R&D alliance 

The different parties agree to combine their knowledge to create new innovative products.