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Research and development (R&D) costs are investments in the future by a company or an entire nation. Combined, these two segments of the economy — corporations and government — account for most of the research and development advancements around the world. Companies in industries including pharmaceutical and technology usually earmark a percentage of their profits for research and development costs. These funds are used to develop and upgrade products and services. A government applies research and development to improvements in standard of living, space programs, national security, and government policies, and costs depend on economic growth in the country.
Most companies spend a minimal percentage of profits on research and development costs, but pharmaceutical and technology corporations tend to spend more. In pharmacy, it often takes many years and a great deal of money to introduce a single new drug to the market, and still there are no guarantees that a drug will be approved by regulators. Also, patent protection on blockbuster drugs runs out, making it possible for rivals to create generic versions of the same medicine. In order to continually develop new drugs, pharmaceutical companies employ thousands of people and spend huge amounts of money each year on research and development.
Technology developed by software and semiconductor companies becomes obsolete more quickly than in most other industries, making technology a giant in research and development spending. Since technology can be adopted universally, technology companies sometimes outsource research and development tasks offshore to other countries to save on costs. China and India have highly developed technology industries. It is less costly for some US-based global technology companies to outsource research and development tasks, especially to India, which commands lower wages than China.
Governments spend money on research and development to improve social welfare in a nation. In the US, major contractors hired by the Department of Defense spend billions of US Dollars annually on defense procurement. These contractors are permitted to report reasonable research and development costs as indirect expenses, and therefore recoup a large percentage of those costs.
Depending on the accounting standard that a country adheres to, research and development costs are accounted for differently around the world. In the US, where Generally Accepted Accounting Standards (GAAP) are the norm, any reasonable costs associated with research and development are accounted for as an expense when incurred. The standards for countries using International Financial Reporting Standards (IFRS) are more stringent. Companies based in countries using IFRS cannot report an intangible asset, for instance a software license, as a research and development expense unless certain criteria are met.
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