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The External Financing Of R&D

Research and development (R&D) is a major area of business that requires a great deal of money. However, this field rarely gets enough financing due to the limitations in a competitive market. In order to solve the problem of underinvestment, one needs to understand its causes and available financing options.

The research and development field has two special characteristics that make it stand out among the other investment fields. These features are the reason that makes many investors hesitate before pouring their money into R&D projects.

  • - The first and most important feature is that over 50% of the money invested in this field is spent on the salaries of researchers, the product of their work being knowledge. It is intangible, and is mostly stored inside their minds.
  • This means that when these people leave their companies for particular reasons, they take their main assets with them. Therefore, the money invested in them previously is completely lost.

  • - The second feature that makes R&D investment a risky business is the degree of uncertainty associated with the field. This apprehension hits its peak at the beginning of a project. This is why it is so incredibly difficult to gather enough funds to start a research that may end up providing millions to the investor.
  • Estimation of possible outcomes requires a great deal of analysis and plenty of guesswork. Even low probability projects may deserve financing under certain circumstances.

There are two main types of R&D financing: internal and external. Internal financing is more popular because every company understands the importance of progress. It is impossible to grow without developing new products and strategies. This is why there is a R&D department in every major company. External financing usually takes the form of joined research projects and government support. There is a big difference between the rates of return required by an external investor and the company that invests in its own research. This is the reason why many innovations fail to be developed. If the inventor does not possess the funds to support his or her own research, the speed of the work may become too slow to attract external investors.

Joint research projects are one of the most effective ways to cut down the costs of investment while producing desired innovations. The most efficient external financing method is combining the investments of different companies that pursue common goals, with government subsidies and tax incentives.

Financing research and development is an extremely difficult task. One must use every available external investment option to gather enough funds for the project to succeed.