Why Most Organizations Aren't Funding Innovation

Twelve official definitions for R&D. Zero agreement.

The US government publishes at least a dozen distinct official definitions across agencies, accounting standards, tax authorities, and international bodies. Not one agrees with the others on where research ends and development begins.

Trillions of dollars flow through R&D budgets every year. Boards approve them. Investors evaluate them. Governments subsidize them. Analysts benchmark them. And the term at the center of all of it has no settled definition.

A company can gut its research investment without triggering a single alarm on its income statement. Researchers who gained rare access to confidential federal R&D data found exactly this: when companies face financial pressure, they cut research while leaving development essentially untouched, and the combined number barely moves. Every benchmark, every board conversation, every investment thesis built around the R&D line may be built on sand.

Innovation, ideas made real, requires both. Research is how you find the idea. Development is how you make it real. Strip out the research and you're not innovating, you're iterating on what already exists. Strip out the development and you're just experimenting. The problem is that nobody in the room knows which one they're actually funding, because the definition that would tell them doesn't exist.

Someone needs to draw the line. This episode is about why nobody has, and the definition I think should replace the chaos.

By the end, I'm going to put that definition in front of you and ask you to push back on it. Not to agree. To tell me where it breaks.

How We Got Here

Four institutions took a run at defining R&D. Each one got it right for their own purposes. None of them got it right for yours.

Frascati: Built for Governments

In June 1963, OECD economists met at a villa in Frascati, Italy, south of Rome, and produced what became the international standard for measuring R&D across nations. Now in its seventh edition.

The Frascati Manual divides R&D into three tiers: basic research (theoretical work with no application in view), applied research (original investigation toward a specific practical objective), and experimental development (using existing knowledge to produce new products or processes). To qualify, an activity must be novel, creative, uncertain in outcome, systematic, and transferable.

Used by governments across roughly 75 countries. Solid for what it was designed to do: let nations compare R&D investment on consistent terms.

What Frascati cannot tell you: whether a specific company's spending is creating competitive advantage. It counts the type of activity. It doesn't assess what the activity produces for the organization doing the spending. A company can satisfy every Frascati criterion investigating something every competitor already knows. The knowledge is new to them. That is enough.

The accountants drew a different line, for a different reason, with a different consequence.

FASB: Built for Accountants

In October 1974, the Financial Accounting Standards Board issued Statement No. 2, Accounting for Research and Development Costs, now codified as Topic 730. Every public company filing under US GAAP operates under it.

The rule: all R&D costs expensed as incurred. Research, development, basic, applied: one line on the income statement. Their definition: research is a planned search aimed at discovery of new knowledge. Development is the translation of research findings into a plan or design for a new product.

The rationale is explicit in the original standard. Future benefits from R&D are, in FASB's language, "at best uncertain." Expense everything immediately. The standard solved the problem it was asked to solve, which was accounting treatment