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R&D grant and tax credit support for foreign-owned subsidiaries: Does it pay off?

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  • Lenihan, Helena
  • Mulligan, Kevin
  • Doran, Justin
  • Rammer, Christian
  • Ipinnaiye, Olubunmi

Abstract

Foreign-owned subsidiaries make significant contributions to national Research and Development (R&D) in many host countries. Policymakers often support subsidiaries through R&D grants and R&D tax credits. A key objective of this funding is to leverage R&D-driven firm performance benefits for the host economy. However, the subsidiary's parent firm may decide not to exploit the results from publicly-funded R&D projects in the host country. Therefore, supporting subsidiaries' R&D presents a risk that significant amounts of public funding may translate into little, or no payoffs for the host economy. Our study provides the first evaluation of 1) whether public R&D funding stimulates additional R&D investment in subsidiaries, 2) whether policy-induced R&D drives subsidiary performance, and 3) the differential effects of R&D grants and R&D tax credits. Drawing on a unique panel dataset for Ireland (2007-2016), we find that both R&D supports drive subsidiary R&D, resulting in substantial host country firm performance benefits.

Suggested Citation

  • Lenihan, Helena & Mulligan, Kevin & Doran, Justin & Rammer, Christian & Ipinnaiye, Olubunmi, 2022. "R&D grant and tax credit support for foreign-owned subsidiaries: Does it pay off?," ZEW Discussion Papers 22-003, ZEW - Leibniz Centre for European Economic Research.
    • Handle: RePEc:zbw:zewdip:22003
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    Cited by:

    1. Dumont, Michel, 2022. "Public support to business research and development in Belgium: fourth evaluation," MPRA Paper 115418, University Library of Munich, Germany.

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    More about this item

    Keywords

    Public funding for R&D; Firm performance; Firm ownership; Foreign-owned subsidiaries; Multinational enterprise; R&D tax credit; R&D grant; Policy evaluation;
    All these keywords.

    JEL classification:

    • D22 - Microeconomics - - Production and Organizations - - - Firm Behavior: Empirical Analysis
    • O25 - Economic Development, Innovation, Technological Change, and Growth - - Development Planning and Policy - - - Industrial Policy
    • F23 - International Economics - - International Factor Movements and International Business - - - Multinational Firms; International Business
    • F21 - International Economics - - International Factor Movements and International Business - - - International Investment; Long-Term Capital Movements
    • O38 - Economic Development, Innovation, Technological Change, and Growth - - Innovation; Research and Development; Technological Change; Intellectual Property Rights - - - Government Policy
    • D04 - Microeconomics - - General - - - Microeconomic Policy: Formulation; Implementation; Evaluation
    • H25 - Public Economics - - Taxation, Subsidies, and Revenue - - - Business Taxes and Subsidies
    • O31 - Economic Development, Innovation, Technological Change, and Growth - - Innovation; Research and Development; Technological Change; Intellectual Property Rights - - - Innovation and Invention: Processes and Incentives

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