Cross-border effects of R&D tax incentives

Bodo Knoll,Nadine Riedel,Thomas Schwab,Maximilian Todtenhaupt,Johannes Voget

doi:10.1016/j.respol.2021.104326

Abstract

Existing evidence shows that R&D tax incentives boost countries’ private sector R&D. Given the importance of multinational enterprises (MNEs) for private sector innovation, it is unclear, however, whether firms engage in genuinely new R&D or whether R&D is reallocated across borders. Drawing on data on unconsolidated R&D activity of MNEs in Europe, we provide evidence that responses are dominated by cross-border relocations: More generous tax incentives in one country increase MNEs’ R&D investments in affiliates located there, while lowering R&D investments in affiliates of the same MNE group located in other countries. Globally, firms hardly raise their R&D activities when tax incentives become more generous.

Highlights

Recent years have seen an unprecedented increase in the prevalence and generosity of tax incentives for research and development (R&D)
Drawing on data on unconsolidated R&D activity of multinational enterprises (MNEs) in Europe, we provide evidence that responses are dominated by cross-border relocations: More generous tax incentives in one country increase MNEs’ R&D investments in affiliates located there, while lowering R&D investments in affiliates of the same MNE group located in other countries
The evidence provided in this study indicates that MNEs reallocate R&D across borders when R&D tax incentives change, implying that R&D investments at different MNE group locations act as substitutes

Summary

Introduction

Recent years have seen an unprecedented increase in the prevalence and generosity of tax incentives for research and development (R&D). Theory suggests that granting R&D tax subsidies to private sector firms internalizes positive externalities of corporate R&D and increases inefficiently low R&D investment levels (Arrow, 1962; Hall and Van Reenen, 2000). In line with this notion, evidence shows that the social returns to R&D investments outweigh their private returns (see e.g., Hall et al, 2010; Bloom et al, 2013) and that countries can increase R&D activity within their borders by lowering R&D tax costs (see the literature review below). We make use of rich micro-level panel data on R&D activities of multinational enterprises (MNEs)

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Discussion

Conclusion