Cross-Border Effects of R&D Tax Incentives

Abstract Existing evidence shows that R&D tax incentives boost countries’ private sector R&D. Given the importance of multinational enterprises (MNEs) for private sector innovation, 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 provide evidence that responses are dominated by cross-border relocations: 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 raise their R&D activities when tax incentives become more generous.