Research and development

Cycle of research and development

Research and development (R&D), also known in Europe as research and technical (or technological) development (RTD), is a general term for activities in connection with corporate or governmental innovation. The activities that are classified as R&D differ from company to company, but there are two primary models, with an R&D department being either staffed by engineers and tasked with directly developing new products, or staffed with industrial scientists and tasked with applied research in scientific or technological fields which may facilitate future product development. In either case, R&D differs from the vast majority of corporate activities in that it is not often intended to yield immediate profit, and generally carries greater risk and an uncertain return on investment.

Background

New product design and development is more often than not a crucial factor in the survival of a company. In an industry that is changing fast, firms must continually revise their design and range of products. 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.

A system driven by marketing is one that puts the customer needs first, and only produces goods that are known to sell. Market research is carried out, which establishes what is needed. If the development is technology driven then R&D is directed toward developing products that market research indicates will meet an unmet need.

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. 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 and with broad forecasts of commercial yield.

Statistics on organizations devoted to "R&D" may express the state of an industry, the degree of competition or the lure of progress. Some common measures include: budgets, numbers of patents or on rates of peer-reviewed publications. Bank ratios are one of the best measures, because they are continuously maintained, public and reflect risk.

In the U.S., 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%. Although Allergan (a biotech company) tops the spending table with 43.4% investment, anything over 15% is remarkable and usually gains a reputation for being a high technology company. Companies in this category include pharmaceutical companies such as Merck & Co. (14.1%) or Novartis (15.1%), and engineering companies like Ericsson (24.9%).[1] Such companies are often seen as credit risks because their spending ratios are so unusual.

Generally such firms prosper only in markets whose customers have extreme needs, such as 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 from 60% to 90% of revenues. That is, gross profits will be as much as 90% of the sales cost, with manufacturing costing only 10% of the product price, because so many individual projects yield no exploitable product. Most industrial companies get 40% revenues only.

On a technical level, high tech organizations explore ways to re-purpose and repackage advanced technologies as a way of amortizing the high overhead. They often reuse advanced manufacturing processes, expensive safety certifications, specialized embedded software, computer-aided design software, electronic designs and mechanical subsystems.

Research has shown that firms with a persistent R&D strategy outperform those with an irregular or no R&D investment program.[2]

Business

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

Research and development is of great importance in business as the level of competition, production processes and methods are rapidly increasing. It is of special importance in the field of marketing where companies keep an eagle eye on competitors and customers in order to keep pace with modern trends and analyze the needs, demands and desires of their customers.

Unfortunately, research and development are very 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".[3]

Research is also the most risky financing area because both the development of an invention and its successful realization carries uncertainty factors including the profitability of the invention.[4]

Benefit of research and development by sector

In general, it has been found that there is a positive relationship between research and development and firm productivity across all sectors, but that this positive relationship is much stronger in high-tech firms than in low-tech firms.[5][6] 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.[7] While the strength of the relationship between R&D spending and productivity in low-tech industries is less than in high-tech industries, studies have been done showing non-trivial carryover effects to other parts of the marketplace by low-tech R&D.[8]

Government expenditures

United States

President Barack Obama requested $147.696 billion for research & development in FY2011.[9] Much of this spending is devoted to basic research on the mechanisms of disease.

European Union

The funding from government organizations, like the European Union's Seventh Framework Program (FP7), and their alliance with R&D has made their research more efficient. However, government-funded research that paid for the work in discovering the human genetic code (DNA) has patent-restrictions.

See also

Notes

  1. ↑ All figures UK R&D Scoreboard as of 2006.
  2. ↑ Johansson; Lööf (December 2008). "The Impact of Firm's R&D Strategy on Profit and Productivity".
  3. ↑ "Aerospace and Defense: Inventing and Selling the Next Generation" (PDF). Center for Strategic and International Studies.
  4. ↑ "Investor-partner business partner finder Business dictionary".
  5. ↑ Ortega-Argiles, Raquel; Potters, Lesley; Vivarelli, Marco (2011). "R&D and productivity: testing sectoral peculiarities using micro data". Empirical Economics 41 (3): 817–839. doi:10.1007/s00181-010-0406-3.
  6. ↑ Ortega-Argiles, Raquel; Piva, Mariacristina; Vivarelli, Marco (2011). "Productivity Gains from R&D Investment: Are High-Tech Sectors Still Ahead?". IZA Discussion Papers (IZA) (5975): 1–22.
  7. ↑ Crespi, Francesco; Antonelli, Cristiano (2011). "Matthew Effects and R&D Subsidies: Knowledge Cumulability in High-Tech and Low-Tech Industries". Working Papers (Università degli Studi Roma Tre) (140): 1–24.
  8. ↑ Mendonca, Sandro (2009). "Brave Old World: Accounting for 'High-Tech' Knowledge in 'Low-Tech' Industries". Research Policy 38 (3): 470–482. doi:10.1016/j.respol.2008.10.018.
  9. ↑ https://fas.org/sgp/crs/misc/R41098.pdf

External links

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