Research and development — commonly abbreviated as R&D — is a term used across business, government, and academia to describe creative, systematic work undertaken to increase the stock of knowledge and to devise new applications of available knowledge. In a business context, R&D encompasses the efforts a company makes to develop new products, improve existing ones, create new processes, or resolve technical questions. This page explains R&D in ordinary business and economic terms and then distinguishes general business R&D from the specific concept of "qualified research" under the federal R&D tax credit. It is educational and is not individualized advice.
R&D in Plain English
In ordinary business terms, R&D is the work a company does to figure out something new — a new product, a better process, a new material, an improved formula, or a new way of doing things. It involves experimentation, testing, and evaluation, rather than simply following established steps. A company experimenting with a new material to meet a performance target, evaluating alternative software architectures, or testing process changes to improve yield is engaged in the kind of work commonly described as R&D.
The OECD Frascati Definition
The internationally recognized definition of R&D comes from the OECD Frascati Manual, which is used by statistical agencies around the world — including the U.S. National Center for Science and Engineering Statistics (NCSES) — to measure R&D activity. The Frascati Manual defines research and experimental development as "creative and systematic work undertaken in order to increase the stock of knowledge — including knowledge of humankind, culture and society — and to devise new applications of available knowledge." The manual identifies common features of R&D: it is aimed at new findings, based on original concepts or hypotheses, and is transferable or reproducible.
Basic Research, Applied Research, and Experimental Development
The Frascati Manual distinguishes three types of R&D:
- Basic research — experimental or theoretical work undertaken primarily to acquire new knowledge of the underlying foundations of phenomena and observable facts, without any particular application in view.
- Applied research — original investigation undertaken in order to acquire new knowledge, directed primarily towards a specific practical aim or objective.
- Experimental development — systematic work, drawing on knowledge gained from research and practical experience, that is directed to producing new materials, products, or devices; installing new processes, systems, or services; or improving substantially those already produced or installed.
In a business context, most R&D is applied research or experimental development — work directed at a specific practical aim, such as developing or improving a product or process.
R&D in the Business Context
In business, R&D is the work that goes into creating or improving what a company sells or how it operates. A manufacturer experimenting with new materials, a software company evaluating alternative architectures, a food company developing a new formulation, or an engineering firm testing a new process design are all engaged in activities commonly described as R&D. The work is characterized by technical uncertainty — the company does not know at the outset whether, how, or in what form the desired result can be achieved — and by experimentation — the company evaluates alternatives to resolve that uncertainty.
General Business R&D vs. "Qualified Research" Under IRC Section 41
This distinction is critical. "R&D" in the general business sense is a broad concept that encompasses a wide range of innovative and technical work. "Qualified research" is a specific, defined category of activity under Section 41 of the Internal Revenue Code that may be taken into account for the federal R&D tax credit. The two are not the same:
- A business can be engaged in R&D in the general sense without every activity constituting qualified research.
- An activity that is innovative, technical, or product-related may not satisfy the statutory and regulatory requirements for qualified research.
- The qualified-research analysis turns on whether the activity meets the four-part test (permitted purpose, technological in nature, elimination of uncertainty, process of experimentation) applied to a business component, and whether any exclusions apply.
For more on the specific requirements, see our page on qualified research, and for the four-part test, see our page on the four-part test.
Why the Distinction Matters
The distinction matters because the label "R&D" is used loosely in business. A company may describe its development work as "R&D" in marketing materials, internal documents, or financial statements, but that label does not determine whether the work qualifies for the federal tax credit. The credit analysis looks at what the business actually did — the nature of the activities, the technical uncertainty, the process of inquiry, and the applicable exclusions — not at how the work is described. For more on the credit, see our page on what the R&D tax credit is.
R&D as Measured by Statistical Agencies
Statistical agencies like the NSF NCSES measure business R&D through surveys such as the Business Enterprise Research and Development (BERD) Survey and the Annual Business Survey (ABS). These surveys collect data on R&D performance and funding by U.S. businesses, including the type of R&D (basic, applied, experimental development), the source of funding, and the location of performance. The statistical definition of R&D, based on the Frascati Manual, is broader than the tax-credit definition of qualified research — it captures business R&D activity for statistical purposes, not for tax-credit qualification.
What This Page Is Not
This page is a general introduction to the concept of research and development. It is not a determination that any particular activity constitutes R&D in the general sense, or that any particular activity constitutes qualified research for the federal tax credit. Those determinations depend on the specific facts and on the applicable definitions and rules. For the tax-credit-specific concept, see our page on qualified research.
Key Takeaway
Research and development (R&D) is creative, systematic work undertaken to increase knowledge and devise new applications. In a business context, it encompasses the efforts a company makes to develop new products, improve existing ones, create new processes, or resolve technical questions. General business R&D is a broader concept than "qualified research" under IRC Section 41 — the label "R&D" does not determine whether work qualifies for the federal tax credit. For the tax-credit-specific concept, see our page on qualified research, and for examples of R&D activities, see our page on research and development examples.