International Taxation and the Location of Inventive Activity

James R. Hines Jr. and Adam B. Jaffe

in International Taxation and Multinational Activity

Published by University of Chicago Press

Published in print March 2001 | ISBN: 9780226341736
Published online February 2013 | e-ISBN: 9780226341750 | DOI:
International Taxation and the Location of Inventive Activity

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Governments typically offer very attractive tax treatment to investments in research and development (R&D), because R&D is thought to be associated with large positive economic spillovers. One of the factors contributing to the generosity of tax benefits for R&D is competition among governments to attract R&D-intensive investments by multinational corporations (MNCs). In spite of the frequency with which R&D receives generous tax subsidies, and the widespread belief that these subsidies encourage the discovery and development of new technologies, very little of a quantitative nature is known about the impact of tax rules on the international location of innovative activity. This chapter examines the effect of taxation on the distribution of inventive activity between the United States and foreign countries. It analyzes the effect of U.S. tax changes, particularly those introduced by the Tax Reform Act of 1986, on the international pattern of subsequent patenting by U.S. multinationals. It shows that domestic tax incentives can significantly influence not only the rate of domestic innovation, but also the rate of foreign innovation by U.S. multinationals.

Keywords: research and development; innovation; United States; tax incentives; multinational corporations; patenting; Tax Reform Act; taxation

Chapter.  13029 words. 

Subjects: International Economics

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