Recent years have seen an unprecedented increase in the prevalence and generosity of tax incentives for research and development (R&D). Today, 30 out of the 36 OECD countries offer preferential tax treatment for R&D expenditure, while less than half of these countries had implemented R&D tax incentive schemes 25 years ago. Despite the growing globalization of corporate R&D, surprisingly little is known about the cross-border effects of R&D tax incentives. In this paper, we fill this gap and assess whether changes of R&D tax incentives in one country do not only impact R&D investment there but also affect R&D activity in other jurisdictions. To this end, we make use of rich micro-level panel data on R&D activities of multinational enterprises (MNEs).

In line with prior studies, we find that lower R&D tax costs positively impact corporate R&D investments in the policy-changing country. However, the analysis also points to a positive and statistically significant cross-border relocation effect: Lower R&D tax costs at one group location of an MNE are associated with diminished R&D investments at entities in other locations that belong to the same MNE group. In absolute terms, the estimated cross-border and host country tax effects do not differ, implying that sum is likely zero. On average, R&D tax incentives are hence suggested to serve as beggar-thy-neighbor instruments where one country’s gain in R&D activity is another countries loss. R&D tax policies do not appear to expand the global R&D investment of MNEs.

Knoll, Bodo, Nadine Riedel, Thomas Schwab, Maximilian Todtenhaupt and Johannes Voget: Cross-border effects of R&D tax incentives, Research Policy, 2021, 50(9), 104326, Online 28.07.2021.

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