Does Foreign Tax Arbitrage Promote Innovation?
50 Pages Posted: 16 Nov 2015 Last revised: 25 Aug 2019
Date Written: August 2019
Using confidential data on the foreign operations of US multinational firms, I examine innovation in the context of an unexpected policy shock that facilitated foreign tax arbitrage. I find that after the shock, US multinationals shifted more of their intellectual property and taxable income to low tax countries, increasing the after-tax return to innovative activity. In response, US multinationals increased their innovation in the US, whether measured using R&D expenditures, patent applications, or patent citations. Innovation spillovers, in the form of follow-on patenting, also appear to accrue primarily in the US. The results suggest foreign tax arbitrage promotes innovation.
Keywords: Multinational firms, tax avoidance, intellectual property, innovation
JEL Classification: F23, H26, O30, O34
Suggested Citation: Suggested Citation