Thinking Outside the Box: The Cross-border Effect of Tax Cuts on R&D

Abstract

We analyze how a reduction of the tax rate on corporate income from intellectual property (IP) in one country, known as a patent box regime, affects corporate R&D activity in other countries. Combining data on patents and multinational corporation networks, we show that the cross-border effect of tax policy changes depends on whether co-location of the IP and the underlying R&D activity is required. Patent boxes without such a requirement increase patent output in other countries. Patent boxes with such a requirement reduce patent output abroad but only when relocation costs for R&D activity are small.

Keywords: Taxation, Cross-border, Innovation, Multinational Firms

JEL Classification: F23, H25, O31