Cross-Border Effects of R&D Tax Incentives

Abstract

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 the unconsolidated R&D activity of European MNEs, we show that R&D tax incentives serve as beggar-thy-neighbor instruments: More generous tax incentives at one group location increase MNEs' R&D investments in the policy-changing country, while lowering R&D investments at foreign group locations. Globally, firms hardly respond to changed R&D tax incentives.

Keywords: R&D tax incentives, R&D investment, multinational firms

JEL Classification: H2, H7