R&D and the Rising Foreign Profitability of U.S. Multinational Corporations

54 Pages Posted: 10 Oct 2017 Last revised: 9 Oct 2019

See all articles by Lisa De Simone

Lisa De Simone

University of Texas at Austin

Jing Huang

Virginia Polytechnic Institute & State University - Pamplin College of Business

Linda K. Krull

University of Oregon

Date Written: July 2019

Abstract

We investigate how R&D contributes to rising foreign profitability in U.S. multinational corporations through wage and tax incentives. Our results suggest that wage savings increase foreign profit margins derived from foreign R&D, while tax incentives increase foreign profit margins derived from domestic R&D. By exploring their relative importance, we find that wage savings are more important than tax incentives in explaining foreign profit margins when the wage discount substantially exceeds tax incentives, and vice versa. Cross-sectional tests show that firms respond more to foreign R&D wage savings when they have access to local human talent, but less as the cost of conducting foreign R&D increases. Firms respond less to tax incentives to shift income derived from domestic R&D as transfer pricing risk increases. Our evidence sheds light on the importance of R&D-related income shifting that potentially separates the location of economic activity from the location of income.

Keywords: Multinational Tax, Income Shifting, R&D, Intangibles, Base Erosion

JEL Classification: H25, H26

Suggested Citation

De Simone, Lisa and Huang, Jing and Krull, Linda K., R&D and the Rising Foreign Profitability of U.S. Multinational Corporations (July 2019). Available at SSRN: https://ssrn.com/abstract=3050016 or http://dx.doi.org/10.2139/ssrn.3050016

Lisa De Simone (Contact Author)

University of Texas at Austin ( email )

2110 SPEEDWAY
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Austin, TX 78705
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HOME PAGE: http://www.lisa-desimone.com

Jing Huang

Virginia Polytechnic Institute & State University - Pamplin College of Business ( email )

250 Drillfield Drive
Blacksburg, VA 24061
United States

Linda K. Krull

University of Oregon ( email )

1208 University of Oregon
Eugene, OR 97403-1208
United States
541-346-3252 (Phone)

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