Research and development refers to the work a business conducts for the innovation, introduction and improvement of its 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.
Reasons to conduct R&D
Before any new product is released in to the market place it goes through a significant research phase and development phase. Some companies use R&D to update existing products or conduct quality checks. When this happens, a business evaluates a product to ensure its still adequate, and additional improvement ideas are posed.
Research and development Expenses
R&D expenses are any activities of expenses associated with the research and development of a company’s goods or services. R&D expenses are a type of operating expenses and can be deducted such on a business tax return. This type of expenses is incurred in the process of finding and creating new products or services. The Act of a company conducting its own R&D offers results in the ownership of intellectual property in the form of patents or copyrights.
An important component of a company’s R&D is its R&D expenses. These expenses can be relatively minor, or they can easily run in to billions of dollars for large corporations. R&D expenses are usually the highest for industrial, technological, health care and pharmaceutical firms. Some companies reinvest a significant portion of their profits back in to R&D, as is the case with technology companies since they see it as an investment in their continued growth.
Who is 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, price water house coopers, the following ten companies spent the most on innovation and improvement in 2015.
Advantages & Disadvantages
One of the most important benefits of R&D, in many industries, is the procurement of patents. Patents cannot only give monopoly power to a single firm but it can also give market power to an oligopoly through cross licensing of patents. For instance, Google recently purchased Motorola for its 17,000 patents so that it can defend itself against infringement suits brought by Apple and other companies. In the American legal systems, because defendants have to pay their own costs, if a company countersue, then the plain tiffs have little to lose and everything to gain.
Firms in a pure competition market rarely spend money for research and development, because they do not earn economic profits. For instance, farmers use well – established methods to compete in the market place, but most of the innovations in farming come, not from farmers, but from the government and from technology companies that develop specific products for farming , such as the development of new seeds.
Creative Destruction
The relentless advance of technology causes what Joseph Schumpeter called creative destruction in his book capitalism, socialism and Democracy, published in 1942, when new technology creates whole new industries and destroys the old ones, such as when the Auto industry destroyed the blacksmith industry, or transforms them, such as the transformation of family farms in to giant enterprises that use large machines to reduce costs in farming.
Computers, robotics, and software are accelerating the pace, so that any company that does not adjust to the times and to the continually evolving competition will cease to be a going concerns.