Multi-Jurisdictional Tax Incentives and the Location of Innovative Activities

Abstract

Research and development (R&D) tax incentives offered by foreign countries and differences between U.S. and foreign tax rates provide opportunities that may affect the location of U.S. multinationals' innovative activities. Using firm-level patenting data to help identify the country-specific location of innovations from 1986 to 2000, I examine the relation between innovative activities performed in a foreign country and these tax incentives. I find evidence that the foreign percentage of innovative activities is associated with the attractiveness of foreign R&D tax incentives. In addition, the results suggest that firms in excess foreign tax credit positions decrease the amount of R&D activities in a foreign location with increased foreign tax rates, consistent with income shifting incentives. In contrast, I find that the firms in deficit foreign tax credit positions increase their foreign R&D activities with increasing foreign tax rates.