research and development

What It Is

Research and development (R&D) aims to create new technology or information that can improve the effectiveness of products or make the production of products more efficient.

How It Works

Let's say company XYZ is a pharmaceutical company that produces pain relieving medication. XYZ has several competitors, so the efficient production of medication is essential for it to maintain or expand its share in the market. In order to continue to produce effective medication, XYZ needs to allocate much of its resources, both financial and human, to the development of more effective pain relieving medication. Use of these resources is called research and development.

Why It Matters

Research and development is more important to some companies than to others.  For example, a computer software company would spend much more on R&D than a retail sales company would. Technology companies survive by developing more effective technology than their competitors. A company like Apple (Nasdaq: AAPL) has many employees that work in R&D because Apple competes in its market by first developing and then releasing devices that are better and more appealing than ones created by competitors.

Research and development especially affects investors in technology or pharmaceutical companies. Since revenue is generated by selling products that depend on being more useful and more advanced than similar products sold by competitors, development of revolutionary technology can drastically increase the value of investments in that particular company. Therefore, investors need to pay attention to research and development news, because the discovery and development of better technology begins with having a successful R&D department.

Source: Investing Answers