Multi-Jurisdictional Tax Incentives and the Location of Innovative Activities
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Date
2009-08-25T15:41:42Z
Authors
MacDonald, Christy
Journal Title
Journal ISSN
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Publisher
University of Waterloo
Abstract
In this dissertation, I explore the effect of tax incentives on where U.S. multinationals decide to locate their innovative activities worldwide. Research and development (R&D) tax incentives offered by foreign countries and differences between U.S. and foreign tax rates provide opportunities that may influence where multinationals decide to locate their innovative activities. Using firm-level patenting data that identifies the country-specific location of innovations from 1986 to 2000, I examine the relation between innovative activities performed in a foreign country and these tax incentives using the Heckman (1979) two step estimation approach. I find evidence that the foreign percentage of innovative activities is associated with the attractiveness of foreign R&D tax incentives and with an increase in the effect of U.S. R&D allocation rules. In addition, the results suggest that firms in excess foreign tax credit positions decrease the amount of R&D activities in a foreign location with increased foreign tax rates, consistent with income shifting incentives. In contrast, I find that the firms in deficit foreign tax credit positions increase their foreign R&D activities with increasing foreign tax rates. This study is the first to examine and provide evidence of the influence of foreign R&D tax incentives and income shifting incentives on a U.S. multinational’s decision on where to locate R&D activities.
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Keywords
patents, tax incentives, multi-jurisdictional, innovative activities