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R&D - costs and benefits

researchThere are some distinct costs and limitations associated with R&D.

R&D is expensive and there is no guaranteed success. A firm needs to employ expensive scientists and/or researchers (they tend to be rare, and so in demand) and provide expensive facilities in which they can work. Failure rates are very high; few ideas make it to commercialisation.

It is clearly an economy of scale, so larger firms can afford greater investment in R&D, which contributes to their continued growth, possibly at the expense of smaller firms. However, since returns are likely to be in the future, the R&D budget is susceptible to cuts in poor economic periods, as expenditure on R&D has significant opportunity costs in the short run.

R&D may be controversial with new products pushing the boundaries on what is social acceptability and challenging exiting ethical values. For example,

  • Medical researchers believe that stem cell therapy has the potential to dramatically change the treatment of human disease, but it can involve the use of human embryos, which is seen as unacceptable by several religious and pro-life pressure groups.
  • The use of genetically modified (GM) products has been consistently opposed by a number of pressure groups, such as Greenpeace.

However, there are many benefits arising out of the R&D process:

  • Higher sales and profits as a result of brand switching and increased customer satisfaction levels
  • First mover advantage
  • Allows entry into new markets or market segments
  • Possible increase in market share as the firm gains a competitive edge
  • Improvements in quality
  • Greater employment opportunities and potentially higher morale as employees feel greater pride and confidence in the firm's product range
  • Social benefit arising and an improved quality of life, especially as a result of medical improvements

R&D is likely to result in the taking out of new patents, copyrights and trademarks.