research and development (R&D)

The process of using labour, materials, and capital to enable a firm to produce a particular product in the future. New products and techniques require expensive testing for effectiveness, durability, and safety. R&D is carried on in a wide variety of sectors, but is concentrated in what are termed ‘high-tech’ industries, including electronics, aviation, atomic energy, and pharmaceuticals. All the world's major industrial countries spend heavily on R&D, funded both by business and, largely because of its defence applications, by governments.

The phrase research and development (also R and D or R&D) has a special commercial significance apart from its conventional coupling of scientific research and technological development.

In general, R&D activities are conducted by specialized units or centers belonging to companies, universities and state agencies.

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. A high technology company such as a computer manufacturer might spend 7%. Although Allergan (a biotech company) tops the spending table 43.4% investment, anything over 15% is remarkable and usually gains a reputation for being a high technology company.

Such companies are often seen as poor 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.

Generally the largest technology companies not only have the largest technical staffs, but also manage them most effectively.

On a technical level, high tech organizations explore ways to re-purpose and repackage advanced technologies as a way of amortising the high overhead.