Small businesses may see as much as a three percent increase in market value for every 10 percent hike in investment in research and development (R&D), according to a March 2009 study sponsored by the U.S. Small Business Administration (SBA). The study found that the relationship between R&D and business growth and innovation can vary according to industry. Industries such as industrial machinery, trucks and tractors, computing equipment, and mechanical goods manufacturing were the most likely to benefit from increased R&D spending.
"The industries that are typically associated with rapid technological improvements benefit from greater R&D expenditures. Industries with more mature activity or that are service-oriented may not reap as much benefit from greater R&D expenditures," say the study's authors, C.J. Isom and David R. Jarczyk, of the Ceteris Inc., an independent economic consulting group.
Many in the public think of R&D as something that only big businesses undertake, plowing billions into huge labs, vast testing fields, wind tunnels, and crash dummies flailing around as autos are crashed into walls. R&D is associated with the pharmaceutical industry, miracle cures, laser eye surgery, and super fast jet travel. To be sure, a vast amount of the money expended on formal research is expended by large corporations -- often on relatively trivial improvements of products already doing quite a good job -- and by government on weapons systems and space exploration. The glory and the power thus displayed before our eyes on television fail to remind us that the crucial research and development on which much else is based has been -- and continues to be -- the work of small businesses and entrepreneurs.
The pages below will outline the role that R&D can play in small business, how to select and terminate R&D projects, and tax advantages of an R&D strategy.
Objectives of R&D in a Small Business
Small businesses are instrumental in fueling the U.S. economy, as they employ half of all private sector employees and generate more than half of the nation's non-farm gross domestic product, according to the SBA. Small firms have also been a harbinger of technological change. They are awarded 13 to 14 more times more patents per employee than large firms, the SBA notes.
Just look behind some of the nation's most profitable industries today and you often find an entrepreneur or a small business. The explosive development of the oil industry was triggered by the invention of an effective kerosene lamp by Michael Dietz in 1859. Dietz ran a small lamp production business. Oil drilling began in earnest to support such lighting applications. An unwanted residue of kerosene refining was -- gasoline, burned off as useless waste -- until the first cars came along. The story of Thomas Edison is worth rereading occasionally to correct ones vision of modern R&D. Chester Carlson, the inventory of xerography, perfected his invention in part-time labors in a makeshift lab while working as a patent attorney. The computer revolution came about because two young men, Steve Wozniak and Steve Jobs, put together a personal computer in a garage and thus triggered the Information Age.
Countless innovations large and small were made by tinkering individuals or small business people trying something new. The fact that many of these entrepreneurial, inventive, innovative, and persistent individuals are the fathers and mothers of great companies -- indeed of whole industries -- that now dominate formal R&D should not obscure their humble beginnings and catch-as-catch-can methods of discovering the new.
R&D is a process intended to create new or improved technology that can provide a competitive advantage at the business, industry, or national level. While the rewards can be very high, the process of technological innovation (of which R&D is the first phase) is complex and risky. The majority of R&D projects fail to provide the expected financial results, and the successful projects (25 to 50 percent) must also pay for the projects that are unsuccessful or terminated early by management. In addition, the originator of R&D cannot appropriate all the benefits of its innovations and must share them with customers, the public, and even competitors. For these reasons, a company's R&D efforts must be carefully organized, controlled, evaluated, and managed.
Types of R&D
The National Science Foundation (NSF) defines three types of R&D:
Basic Research. Basic research has as its objectives a fuller knowledge or understanding of the subject under study, rather than a practical application thereof. As applied to the industrial sector, basic research is defined as research that advances scientific knowledge but does not have specific commercial objectives, although such investigation may be in the fields of present or potential interest to the company.
Applied Research. Applied research is directed towards gaining knowledge or understanding necessary for determining the means by which a recognized and specific need may be met. In industry, applied research includes investigations directed to the discovery of new knowledge having specific commercial objectives with respect to products, processes, or services.
Development. Development is the systematic utilization of the knowledge or understanding gained from research toward the production of useful materials, devices, systems, or methods, including design and development of prototypes and processes.
At this point, it is important to differentiate development from engineering. Engineering is the application of state-of-the-art knowledge to the design and production of marketable goods. Research creates knowledge, and development designs and builds prototypes and proves their feasibility. Engineering converts these prototypes into products that can be offered to the marketplace or into processes that can be used to produce commercial products and services.
R&D can be conducted in-house, under contract, or jointly with others. In-house R&D commands a strategic advantage: the company is the sole owner of the know-how created and can protect it from unauthorized use. R&D is also basically a learning process; in-house research thus trains the company's own research people who may go on to ever better things.
Selecting R&D Projects
Industrial R&D is generally performed according to projects (i.e., separate work activities) with specific technical and business goals, assigned personnel, and time and money budgets. These projects can either originate "top down" (for instance, from a management decision to develop a new product) or "bottom up" (from an idea originated by an individual researcher). The size of a project may vary from a part-time effort of one researcher for a few months with a budget of thousands of dollars, to major five- or ten-year projects with large, multidisciplinary teams of researchers and budgets of millions of dollars. Therefore, project selection and evaluation is one of the more critical and difficult subjects of R&D management. Of equal importance, although less emphasized in practice, is the subject of project termination, particularly in the case of unsuccessful or marginal projects.
Normally, a company or a laboratory will have requests for a higher number of projects than can be effectively implemented. Therefore, R&D managers are faced with the problem of allocating scarce resources of personnel, equipment, laboratory space, and funds to a broad spectrum of competing projects. Since the decision to start on an R&D project is both a technical and a business decision, R&D managers should select projects on the basis of the following objectives, in order of importance:
