Does Foreign Tax Arbitrage Promote Innovation?

50 Pages Posted: 16 Nov 2015 Last revised: 25 Aug 2019

See all articles by James F. Albertus

James F. Albertus

Carnegie Mellon University - David A. Tepper School of Business

Date Written: August 2019

Abstract

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

Albertus, James F., Does Foreign Tax Arbitrage Promote Innovation? (August 2019). Available at SSRN: https://ssrn.com/abstract=2691064 or http://dx.doi.org/10.2139/ssrn.2691064

James F. Albertus (Contact Author)

Carnegie Mellon University - David A. Tepper School of Business ( email )

5000 Forbes Avenue
Pittsburgh, PA 15213-3890
United States

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