research and development importance in business

Understanding Research and Development in Business: A Comprehensive Guide

Learn about the crucial role of Research and Development (R&D) in business and how it can drive innovation, growth, and competitive advantage.

Barrie Dowsett

Chief Executive Officer

10 minute read

Research and Development (R&D) is a key driver of innovative and competitive business practices, as it enables companies to stay ahead of the curve in industries that are constantly evolving. Companies in Ireland recognise this and have been investing more in R&D over the past decade, with funding from government grants and tax incentives such as the R&D tax credit .

R&D encompasses a variety of activities aimed at generating new and improved products and services, as well as enhancing existing ones. It involves systematic investigation, experimentation, and exploration to discover new knowledge and improve existing products, processes, or services. R&D takes place in various forms, such as design, testing, prototyping, and scaling up, and the outcomes can range from products, inventions, patents, or knowledge.

There are many benefits to investing in R&D for Irish businesses. For one, R&D can help improve their market position, generate revenue and enhance their competitive advantage. By innovating through R&D, companies can offer unique, high-quality products or services that can set them apart from their competitors. Moreover, companies can develop new technologies, insights and knowledge that can be leveraged to create future products and services.

However, R&D is not without its challenges. Investing in R&D can be costly and uncertain, and it can take time to see the return on investment. Furthermore, companies need to ensure that they have the right talent, resources, and infrastructure in place to support their R&D initiatives.

In this blog, we will provide a comprehensive guide to understanding R&D for Irish businesses. We will explore the various forms of R&D, its importance for business growth and innovation, and how to implement effective R&D strategies in your business. Whether you are a startup or an established business, this guide will provide you with valuable insights to help you succeed through R&D.

Benefits of R&D in Business

One significant benefit of R&D is its ability to drive innovation and growth by bringing new products and services to the market. Through R&D, companies can better understand their customers' needs, identify new market opportunities, and develop new technologies and products that meet those needs. This not only diversifies a company's product offerings but also strengthens their market position by increasing their revenue streams and expanding their customer base.

Furthermore, R&D enables businesses to gain a competitive advantage by developing unique products and services that differentiate them from their competitors. Companies that invest in R&D can develop and maintain a strong intellectual property portfolio that can prevent competitors from copying their innovations. R&D also helps companies stay ahead of the curve in terms of technology, enabling them to leverage new advancements and establish themselves as leaders within their industries.

In addition, R&D can lead to significant improvements in product quality and performance by allowing companies to develop and test new materials, techniques, and designs. This, in turn, can increase customer satisfaction and loyalty, as well as drive sales and create long-term value for the business.

Finally, R&D can help companies reduce costs and increase efficiency by identifying ways to streamline processes or develop new technologies that are more cost-effective. This can include developing more efficient supply chains or reducing waste through sustainable production methods.

Overall, companies that invest in R&D can reap significant benefits in terms of innovation, growth, and competitive advantage. By continually developing new products and services that meet evolving customer needs and redefining industry standards, these businesses can establish themselves as leaders in their fields and remain sustainable for years to come.

Types of R&D Activities

Research and Development (R&D) activities are broadly categorized into three types: basic research, applied research, and development. Basic research is conducted to gain knowledge about a certain field, phenomenon, or theory without any immediate application. For instance, a pharmaceutical company conducting research on the molecular structure of a protein without any specific drug in mind. Basic research often leads to the discovery of new ideas, theories, and inventions that can eventually be applied in various industries.

Applied research, on the other hand, aims to solve a specific problem or answer a particular question in a practical setting. It involves taking information generated from the basic research and using it to develop useful solutions for specific needs. Applied research is often conducted by companies to improve their products, enhance their services, or identify new opportunities. For instance, a cosmetic company conducting market research to identify customer preferences and develop new products accordingly.

Development involves the translation of applied research findings into a practical form. It involves creating prototypes or models that can be tested and modified to ensure that they meet the desired goals of the project. Development activities can involve various stages, including design, testing, and modification, until the final product or service is produced. For instance, an engineering firm conducting research and development to design and build a new piece of equipment for a specific application.

In summary, basic research provides foundational knowledge and understanding of a certain field, applied research applies this knowledge to address specific problems, and development uses applied research to design and develop new products and services. Each type of R&D plays a crucial role in driving innovation and achieving competitive advantages in the business world. By understanding the different types of R&D activities, businesses can better leverage them to drive growth and success.

Steps Involved in Effective R&D

Effective Research and Development (R&D) requires specific steps to ensure that it addresses the business's needs and goals. The first step is defining the research problem, which means identifying what issues the company wants to address through research. After that, market research must be conducted to gather information about the target market and its needs, preferences, and behaviours. This information is essential in formulating research objectives, which are clear and concise statements about what research aims to achieve. The objectives should align with the research problem identified earlier and should be specific, measurable, achievable, relevant, and time-bound (SMART).

Developing a research plan follows, which involves deciding on the research design, sample size, and data collection methods. The research design could either be qualitative or quantitative, depending on the research question and objectives. The next step is conducting experiments and collecting data using the research plan developed, which could be primary or secondary data. Primary data involves collecting original data through surveys, interviews or observations, while secondary data includes using data that is previously collected and publicly available.

After collecting data, the next step is analysing and interpreting it. In analysing, the data collected should be organised, cleaned, and summarised, after which it can be subjected to various statistical tests to draw conclusions. When interpreting, the findings from the tests are used to answer the research question and match the research objectives. A clear communication mechanism of the findings and recommendations to the relevant stakeholders is essential, and it should be precise, concise, and in a format that is understandable to the recipients.

Finally, R&D should be seen as an ongoing process aimed at improvement and innovation in a business. Continuously redefining research objectives, updating research plans and implementing effective R&D strategies is critical in staying ahead of the competition, remaining relevant, and meeting the evolving needs of the market. Companies should embrace R&D practices as a strategic tool for long-term success, growth and profitability.

Implementing R&D Strategies in Business

Creating an r&d budget.

Creating an R&D budget is a critical step in implementing an effective R&D strategy. Setting aside a budget for R&D activities enables businesses to allocate resources towards research and experimentation that can lead to breakthrough innovations. In general, it is recommended that companies allocate anywhere from 5% to 15% of their revenue towards R&D. However, the exact amount will depend on the industry, the size of the company, and its growth goals.

Building an R&D team

Building an R&D team is also crucial to the success of any R&D strategy. Skilled and diverse R&D teams can bring a range of perspectives and expertise to the table. This can lead to cross-functional collaborations that can uncover new ideas and solutions. Depending on the nature and scale of the R&D activities, companies can consider hiring full-time R&D staff, collaborating with academics or other external experts, or engaging with freelancers or contract workers.

Establishing an R&D process

Establishing an R&D process can help ensure that R&D activities are conducted systematically and efficiently. This can include defining clear research objectives, identifying target markets and customers, conducting feasibility studies, developing prototypes, and conducting trials and tests. Companies can also consider adopting agile methodologies or lean startup principles to foster iterative and lean R&D processes.

Leveraging technology and partnerships

Leveraging technology and partnerships can also help boost the effectiveness of R&D strategies. Technology tools such as virtual and augmented reality simulators, 3D printing, and artificial intelligence can facilitate faster and more cost-effective R&D processes. Partnerships with other companies, suppliers, startups, or research institutions can provide access to complementary expertise, technologies, and markets. Collaborating with customers can also yield valuable insights into their needs and preferences, and can help companies create customer-centric solutions.

Implementing effective R&D strategies requires careful planning, investment, and execution. By creating a dedicated R&D budget, building a skilled and diverse R&D team, establishing clear R&D processes, and leveraging technology and partnerships, Irish businesses can unlock the full potential of R&D to drive innovation, growth, and competitive advantage.

Challenges of R&D in Business

While Research and Development (R&D) is critical for innovation and growth in a business, it is not without its challenges. One challenge that businesses face is cost and resource constraints. R&D requires substantial investment in terms of time, money, and skilled employees. Small and medium-sized businesses (SMEs), in particular, may struggle to allocate sufficient resources towards R&D due to budgetary constraints. They may have limited funds to invest in R&D, which can hamper innovation and limit the scope of the research. Similarly, larger corporations may have the funds to invest in R&D, but may struggle with resource constraints such as a shortage of skilled employees, a lack of facilities or equipment, or finding the right partners for collaboration.

Another challenge of R&D is the inherent uncertainty and risk associated with research activities. The outcome of R&D efforts is often uncertain, and there is no guarantee that the research will lead to a successful innovation. Additionally, R&D can be a lengthy process, and businesses may not see returns on their investment for months or even years. This can make it difficult to justify investment in R&D, especially for SMEs that need to show immediate returns in cash flow.

Finally, there is the challenge of protecting intellectual property. R&D often leads to the creation of intellectual property, such as patents, trademarks, and copyrights. Protecting this intellectual property is crucial, as it can give businesses a competitive advantage and help generate revenue. However, protecting intellectual property can be a time-consuming and expensive process, and businesses must be vigilant in monitoring their intellectual property and taking legal action against infringement.

Cost and resource constraints, uncertainty and risk, and intellectual property protection are just some of the challenges that businesses must navigate to successfully implement effective R&D strategies. Nonetheless, with careful planning, investment, and a reliable R&D process, businesses can successfully leverage R&D to drive innovation, growth, and competitive advantage.

In conclusion, Research and Development (R&D) is a critical tool for businesses looking to drive innovation, growth, and competitive advantage. Without R&D, businesses risk stagnation and getting left behind in a rapidly evolving marketplace. In this blog, we have discussed the importance of R&D in business and how it can drive success.

Businesses looking to implement effective R&D strategies should focus on building a culture of innovation, investing in the right people and resources, and staying up to date with the latest technological advancements. Effective R&D strategies involve identifying market gaps and customer needs, experimenting with new ideas, and using data-driven insights to make informed decisions. Looking to the future, R&D will continue to be a key driver of growth and success for businesses, especially in an increasingly digital and globalized economy.

As market competition grows, businesses will need to invest more in R&D to stay ahead and achieve long-term success. By continuing to innovate and work towards new and exciting breakthroughs, businesses can unlock new opportunities and realize their full potential in today's fast-paced business landscape.

Bring in the experts

Whether you’ve already got a comprehensive R&D strategy in progress or you’re just starting out from scratch, the experts at Myriad Associates are here to help.

We work across the field of innovation funding, with years of experience in  R&D Tax Credits  and  R&D Grants  specifically. We will work alongside you for as long as you need us, whether you require support in creating an effective R&D department, or in planning a particular R&D project. We’ll also be able to discuss which funding options would best suit your needs, helping your R&D bring you the best return on investment.

Contact us today

If you wish to discuss anything we’ve discussed in this article, or about R&D funding for Irish companies, simply call us on call us on +353 1 566 2001 or  send us a message . We’re working remotely during this time and will be pleased to assist you.

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Building an R&D strategy for modern times

The global investment in research and development (R&D) is staggering. In 2019 alone, organizations around the world spent $2.3 trillion on R&D—the equivalent of roughly 2 percent of global GDP—about half of which came from industry and the remainder from governments and academic institutions. What’s more, that annual investment has been growing at approximately 4 percent per year over the past decade. 1 2.3 trillion on purchasing-power-parity basis; 2019 global R&D funding forecast , Supplement, R&D Magazine, March 2019, rdworldonline.com.

While the pharmaceutical sector garners much attention due to its high R&D spending as a percentage of revenues, a comparison based on industry profits shows that several industries, ranging from high tech to automotive to consumer, are putting more than 20 percent of earnings before interest, taxes, depreciation, and amortization (EBITDA) back into innovation research (Exhibit 1).

What do organizations expect to get in return? At the core, they hope their R&D investments yield the critical technology from which they can develop new products, services, and business models. But for R&D to deliver genuine value, its role must be woven centrally into the organization’s mission. R&D should help to both deliver and shape corporate strategy, so that it develops differentiated offerings for the company’s priority markets and reveals strategic options, highlighting promising ways to reposition the business through new platforms and disruptive breakthroughs.

Yet many enterprises lack an R&D strategy that has the necessary clarity, agility, and conviction to realize the organization’s aspirations. Instead of serving as the company’s innovation engine, R&D ends up isolated from corporate priorities, disconnected from market developments, and out of sync with the speed of business. Amid a growing gap in performance  between those that innovate successfully and those that do not, companies wishing to get ahead and stay ahead of competitors need a robust R&D strategy that makes the most of their innovation investments. Building such a strategy takes three steps: understanding the challenges that often work as barriers to R&D success, choosing the right ingredients for your strategy, and then pressure testing it before enacting it.

Overcoming the barriers to successful R&D

The first step to building an R&D strategy is to understand the four main challenges that modern R&D organizations face:

Innovation cycles are accelerating. The growing reliance on software and the availability of simulation and automation technologies have caused the cost of experimentation to plummet while raising R&D throughput. The pace of corporate innovation is further spurred by the increasing emergence of broadly applicable technologies, such as digital and biotech, from outside the walls of leading industry players.

But incumbent corporations are only one part of the equation. The trillion dollars a year that companies spend on R&D is matched by the public sector. Well-funded start-ups, meanwhile, are developing and rapidly scaling innovations that often threaten to upset established business models or steer industry growth into new areas. Add increasing investor scrutiny of research spending, and the result is rising pressure on R&D leaders to quickly show results for their efforts.

R&D lacks connection to the customer. The R&D group tends to be isolated from the rest of the organization. The complexity of its activities and its specialized lexicon make it difficult for others to understand what the R&D function really does. That sense of working inside a “black box” often exists even within the R&D organization. During a meeting of one large company’s R&D leaders, a significant portion of the discussion focused on simply getting everyone up to speed on what the various divisions were doing, let alone connecting those efforts to the company’s broader goals.

Given the challenges R&D faces in collaborating with other functions, going one step further and connecting with customers becomes all the more difficult. While many organizations pay lip service to customer-centric development, their R&D groups rarely get the opportunity to test products directly with end users. This frequently results in market-back product development that relies on a game of telephone via many intermediaries about what the customers want and need.

Projects have few accountability metrics. R&D groups in most sectors lack effective mechanisms to measure and communicate progress; the pharmaceutical industry, with its standard pipeline for new therapeutics that provides well-understood metrics of progress and valuation implications, is the exception, not the rule. When failure is explained away as experimentation and success is described in terms of patents, rather than profits, corporate leaders find it hard to quantify R&D’s contribution.

Yet proven metrics exist  to effectively measure progress and outcomes. A common challenge we observe at R&D organizations, ranging from automotive to chemical companies, is how to value the contribution of a single component that is a building block of multiple products. One specialty-chemicals company faced this challenge in determining the value of an ingredient it used in its complex formulations. It created categorizations to help develop initial business cases and enable long-term tracking. This allowed pragmatic investment decisions at the start of projects and helped determine the value created after their completion.

Even with outcomes clearly measured, the often-lengthy period between initial investment and finished product can obscure the R&D organization’s performance. Yet, this too can be effectively managed by tracking the overall value and development progress of the pipeline so that the organization can react and, potentially, promptly reorient both the portfolio and individual projects within it.

Incremental projects get priority. Our research indicates that incremental projects account for more than half of an average company’s R&D investment, even though bold bets and aggressive reallocation  of the innovation portfolio deliver higher rates of success. Organizations tend to favor “safe” projects with near-term returns—such as those emerging out of customer requests—that in many cases do little more than maintain existing market share. One consumer-goods company, for example, divided the R&D budget among its business units, whose leaders then used the money to meet their short-term targets rather than the company’s longer-term differentiation and growth objectives.

Focusing innovation solely around the core business may enable a company to coast for a while—until the industry suddenly passes it by. A mindset that views risk as something to be avoided rather than managed can be unwittingly reinforced by how the business case is measured. Transformational projects at one company faced a higher internal-rate-of-return hurdle than incremental R&D, even after the probability of success had been factored into their valuation, reducing their chances of securing funding and tilting the pipeline toward initiatives close to the core.

As organizations mature, innovation-driven growth becomes increasingly important, as their traditional means of organic growth, such as geographic expansion and entry into untapped market segments, diminish. To succeed, they need to develop R&D strategies equipped for the modern era that treat R&D not as a cost center but as the growth engine it can become.

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Choosing the ingredients of a winning r&d strategy.

Given R&D’s role as the innovation driver that advances the corporate agenda, its guiding strategy needs to link board-level priorities with the technologies that are the organization’s focus (Exhibit 2). The R&D strategy must provide clarity and commitment to three central elements: what we want to deliver, what we need to deliver it, and how we will deliver it.

What we want to deliver. To understand what a company wants to and can deliver, the R&D, commercial, and corporate-strategy functions need to collaborate closely, with commercial and corporate-strategy teams anchoring the R&D team on the company’s priorities and the R&D team revealing what is possible. The R&D strategy and the corporate strategy must be in sync while answering questions such as the following: At the highest level, what are the company’s goals? Which of these will require R&D in order to be realized? In short, what is the R&D organization’s purpose?

Bringing the two strategies into alignment is not as easy as it may seem. In some companies, what passes for corporate strategy is merely a five-year business plan. In others, the corporate strategy is detailed but covers only three to five years—too short a time horizon to guide R&D, especially in industries such as pharma or semiconductors where the product-development cycle is much longer than that. To get this first step right, corporate-strategy leaders should actively engage with R&D. That means providing clarity where it is lacking and incorporating R&D feedback that may illuminate opportunities, such as new technologies that unlock growth adjacencies for the company or enable completely new business models.

Secondly, the R&D and commercial functions need to align on core battlegrounds and solutions. Chief technology officers want to be close to and shape the market by delivering innovative solutions that define new levels of customer expectations. Aligning R&D strategy provides a powerful forum for identifying those opportunities by forcing conversations about customer needs and possible solutions that, in many companies, occur only rarely. Just as with the corporate strategy alignment, the commercial and R&D teams need to clearly articulate their aspirations by asking questions such as the following: Which markets will make or break us as a company? What does a winning product or service look like for customers?

When defining these essential battlegrounds, companies should not feel bound by conventional market definitions based on product groups, geographies, or customer segments. One agricultural player instead defined its markets by the challenges customers faced that its solutions could address. For example, drought resistance was a key battleground no matter where in the world it occurred. That framing clarified the R&D–commercial strategy link: if an R&D project could improve drought resistance, it was aligned to the strategy.

The dialogue between the R&D, commercial, and strategy functions cannot stop once the R&D strategy is set. Over time, leaders of all three groups should reexamine the strategic direction and continuously refine target product profiles as customer needs and the competitive landscape evolve.

What we need to deliver it. This part of the R&D strategy determines what capabilities and technologies the R&D organization must have in place to bring the desired solutions to market. The distinction between the two is subtle but important. Simply put, R&D capabilities are the technical abilities to discover, develop, or scale marketable solutions. Capabilities are unlocked by a combination of technologies and assets, and focus on the outcomes. Technologies, however, focus on the inputs—for example, CRISPR is a technology that enables the genome-editing capability.

This delineation protects against the common pitfall of the R&D organization fixating on components of a capability instead of the capability itself—potentially missing the fact that the capability itself has evolved. Consider the dawn of the digital age: in many engineering fields, a historical reliance on talent (human number crunchers) was suddenly replaced by the need for assets (computers). Those who focused on hiring the fastest mathematicians were soon overtaken by rivals who recognized the capability provided by emerging technologies.

The simplest way to identify the needed capabilities is to go through the development processes of priority solutions step by step—what will it take to produce a new product or feature? Being exhaustive is not the point; the goal is to identify high-priority capabilities, not to log standard operating procedures.

Prioritizing capabilities is a critical but often contentious aspect of developing an R&D strategy. For some capabilities, being good is sufficient. For others, being best in class is vital because it enables a faster path to market or the development of a better product than those of competitors. Take computer-aided design (CAD), which is used to design and prototype engineering components in numerous industries, such as aerospace or automotive. While companies in those sectors need that capability, it is unlikely that being the best at it will deliver a meaningful advantage. Furthermore, organizations should strive to anticipate which capabilities will be most important in the future, not what has mattered most to the business historically.

Once capabilities are prioritized, the R&D organization needs to define what being “good” and “the best” at them will mean over the course of the strategy. The bar rises rapidly in many fields. Between 2009 and 2019, the cost of sequencing a genome dropped 150-fold, for example. 2 Kris A. Wetterstrand, “DNA sequencing costs: Data,” NHGRI Genome Sequencing Program (GSP), August 25, 2020, genome.gov. Next, the organization needs to determine how to develop, acquire, or access the needed capabilities. The decision of whether to look internally or externally is crucial. An automatic “we can build it better” mindset diminishes the benefits of specialization and dilutes focus. Additionally, the bias to building everything in-house can cut off or delay access to the best the world has to offer—something that may be essential for high-priority capabilities. At Procter & Gamble, it famously took the clearly articulated aspiration of former CEO A. G. Lafley to break the company’s focus on in-house R&D and set targets for sourcing innovation externally. As R&D organizations increasingly source capabilities externally, finding partners and collaborating with them effectively is becoming a critical capability in its own right.

How we will do it. The choices of operating model and organizational design will ultimately determine how well the R&D strategy is executed. During the strategy’s development, however, the focus should be on enablers that represent cross-cutting skills and ways of working. A strategy for attracting, developing, and retaining talent is one common example.

Another is digital enablement, which today touches nearly every aspect of what the R&D function does. Artificial intelligence can be used at the discovery phase to identify emerging market needs or new uses of existing technology. Automation and advanced analytics approaches to experimentation can enable high throughput screening at a small scale and distinguish the signal from the noise. Digital (“in silico”) simulations are particularly valuable when physical experiments are expensive or dangerous. Collaboration tools are addressing the connectivity challenges common among geographically dispersed project teams. They have become indispensable in bringing together existing collaborators, but the next horizon is to generate the serendipity of chance encounters that are the hallmark of so many innovations.

Testing your R&D strategy

Developing a strategy for the R&D organization entails some unique challenges that other functions do not face. For one, scientists and engineers have to weigh considerations beyond their core expertise, such as customer, market, and economic factors. Stakeholders outside R&D labs, meanwhile, need to understand complex technologies and development processes and think along much longer time horizons than those to which they are accustomed.

For an R&D strategy to be robust and comprehensive enough to serve as a blueprint to guide the organization, it needs to involve stakeholders both inside and outside the R&D group, from leading scientists to chief commercial officers. What’s more, its definition of capabilities, technologies, talent, and assets should become progressively more granular as the strategy is brought to life at deeper levels of the R&D organization. So how can an organization tell if its new strategy passes muster? In our experience, McKinsey’s ten timeless tests of strategy  apply just as well to R&D strategy as to corporate and business-unit strategies. The following two tests are the most important in the R&D context:

• Does the organization’s strategy tap the true source of advantage? Too often, R&D organizations conflate technical necessity (what is needed to develop a solution) with strategic importance (distinctive capabilities that allow an organization to develop a meaningfully better solution than those of their competitors). It is also vital for organizations to regularly review their answers to this question, as capabilities that once provided differentiation can become commoditized and no longer serve as sources of advantage.
• Does the organization’s strategy balance commitment-rich choices with flexibility and learning? R&D strategies may have relatively long time horizons but that does not mean they should be insulated from changes in the outside world and never revisited. Companies should establish technical, regulatory, or other milestones that serve as clear decision points for shifting resources to or away from certain research areas. Such milestones can also help mark progress and gauge whether strategy execution is on track.

Additionally, the R&D strategy should be simply and clearly communicated to other functions within the company and to external stakeholders. To boost its clarity, organizations might try this exercise: distill the strategy into a set of fill-in-the-blank components that define, first, how the world will evolve and how the company plans to refocus accordingly (for example, industry trends that may lead the organization to pursue new target markets or segments); next, the choices the R&D function will make in order to support the company’s new focus (which capabilities will be prioritized and which de-emphasized); and finally, how the R&D team will execute the strategy in terms of concrete actions and milestones. If a company cannot fit the exercise on a single page, it has not sufficiently synthesized the strategy—as the famed physicist Richard Feynman observed, the ultimate test of comprehension is the ability to convey something to others in a simple manner.

Cascading the strategy down through the R&D organization will further reinforce its impact. For example, asking managers to communicate the strategy to their subordinates will deepen their own understanding. A useful corollary is that those hearing the strategy for the first time are introduced to it by their immediate supervisors rather than more distant R&D leaders. One R&D group demonstrated the broad benefits of this communication model: involving employees in developing and communicating the R&D strategy helped it double its Organizational Health Index  strategic clarity score, which measures one of the four “power practices”  highly connected to organizational performance.

R&D represents a massive innovation investment, but as companies confront globalized competition, rapidly changing customer needs, and technological shifts coming from an ever-wider range of fields, they are struggling to deliver on R&D’s full potential. A clearly articulated R&D strategy that supports and informs the corporate strategy is necessary to maximize the innovation investment and long-term company value.

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Why You Should Invest in Research and Development (R&D)

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.

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.

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.

National Center for Science and Engineering. " Businesses Invested $32.5 Billion in Assets to Support Their R&D Activities in the United States in 2020 ."

Tax Foundation. " Reviewing the Federal Tax Treatment of Research & Development Expenses ."

Internal Revenue Service. " About Form 6765, Credit for Increasing Research Activities ."

Internal Revenue Service. " Instructions for Form 3800 (2022) ," Page 2.

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