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

Abstract

We provide evidence on the cross-border effect of tax policy on R&D activity. Combining administrative data on patent applications and transfers with corporate ownership information, we show that the direction and size of the cross-border effect depends on whether nexus (i.e. physical presence) is required to benefit from a tax cut. Tax cuts without nexus requirement create tax benefits across borders and generate a positive cross-border effect on R&D output. They also lead to subsequent patent transfers. Tax cuts with nexus requirements generate negative cross-border effects in sectors where the relocation cost of R&D activity is small.

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

JEL Classification: F23, H25, O31