Cross-border effects of R&D tax incentives

22 October 2021 16:10

Cross-border effects of R&D tax incentives

By Bodo Knoll, Nadine Riedel, Thomas Schwab, Maximilian Todtenhaupt and Johannes Voget was published in Research Policy.

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 incentivesResearch Policy, 2021, 50(9), 104326, Online 28.07.2021.