Research and development (R&D, R+D, or R'n'D), known in Europe as research and technological development (RTD), refers to innovative activities undertaken by corporations or governments in developing new services or products, or improving existing services or products.[1] Research and development constitutes the first stage of development of a potential new service or the production process.

R&D activities differ from institution to institution, with two primary models[1] of an R&D department 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. R&D differs from the vast majority of corporate activities in that it is not intended to yield immediate profit, and generally carries greater risk and an uncertain return on investment. However R&D is crucial for acquiring larger shares of the market through the marketisation of new products.

New product design and development is often a crucial factor in the survival of a company. In a global industrial landscape that is changing fast, firms must continually revise their design and range of products. This is necessary as well due to the fierce competition and the evolving preferences of consumers. 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 produces goods that are known to sell.[2] Market research is carried out, which establishes the needs of consumers and the potential niche market of a new product. If the development is technology driven, R&D is directed toward developing products to meet the unmet needs.[citation needed]

In general, research and development 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.[citation needed] 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.[3]

Statistics on organizations devoted to "R&D" may express the state of an industry, the degree of competition or the lure of progress.[4] 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 United States, a typical ratio of research and development for an industrial company is about 3.5% of revenues; this measure is called "R&D intensity".[citation needed] A high technology company, such as a computer manufacturer, might spend 7% or a pharmaceutical companies such as Merck & Co. 14.1% or Novartis 15.1%. Anything over 15% is remarkable, and usually gains a reputation for being a high technology company such as engineering company Ericsson 24.9%, or Allergan a biotech company, tops the spending table with 43.4% investment[5] Such companies are often seen as credit risks because their spending ratios are so unusual.[citation needed]

Generally such firms prosper only in markets whose customers have extreme high technology needs, like certain prescription drugs or special chemicals, scientific instruments, and safety-critical systems in medicine, aeronautics or military weapons.[citation needed]The extreme needs justify the high risk of failure and consequently high gross margins from 60% to 90% of revenues.[citation needed] 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.[citation needed]

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

Research from 2000 has shown that firms with a persistent R&D strategy outperform those with an irregular or no R&D investment program.