Existing evidence shows that R&D tax incentives boost countries’ private sector R&D. Given the importance ofmultinational enterprises (MNEs) for private sector innovation, it is unclear, however, whether firms engagein genuinely new R&D or whether R&D is reallocated across borders. Drawing on data on unconsolidated R&Dactivity 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, whilelowering R&D investments in affiliates of the same MNE group located in other countries. Globally, firmshardly raise their R&D activities when tax incentives become more generous.
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