Cross-Border Effects of R&D Tax Incentives
47 Pages Posted: 20 Nov 2019 Last revised: 3 Nov 2020
Date Written: October 11, 2019
Existing evidence shows that R&D tax incentives boost countries' private sector R&D. As multinational enterprises (MNEs) account for nearly all private sector innovations, it is unclear, however, whether firms engage in genuinely new R&D or whether R&D is reallocated across borders. Drawing on data on unconsolidated R&D activity of MNEs in Europe, we show that R&D tax incentives serve as beggar-thy-neighbor instruments: More generous tax incentives in one country increase MNEs' R&D investments in affiliates located there, while lowering R&D investments in affiliates of the same MNE group located in other countries. Globally, firms hardly respond to changed R\&D tax incentives.
Keywords: R&D tax incentives, R&D investment, multinational firms
JEL Classification: H2, H7
Suggested Citation: Suggested Citation