R&D grants and R&D tax credits to foreign-owned subsidiaries: Does supporting multinational enterprises’ R&D pay off in terms of firm performance improvements for the host economy?

Helena Lenihan, Kevin Mulligan (), Justin Doran, Christian Rammer and Olubunmi Ipinnaiye

The Journal of Technology Transfer, 2024, vol. 49, issue 2, No 13, 740-781

Abstract: Abstract The subsidiaries of foreign-owned multinational firms make significant contributions to national Research and Development (R&D) in many host countries. Policymakers in host countries often support subsidiaries’ R&D efforts, 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 commercially exploit the results from host country-funded R&D projects, in the host country. Therefore, supporting subsidiaries’ R&D presents a unique risk, that significant amounts of scarce public R&D funding may translate into little, or no firm performance payoffs for the host economy. To address this issue, we construct a unique panel dataset, containing 24,404 observations of firms in Ireland over a 10-year period. Using this rich data, we first evaluate the impact of R&D grants and R&D tax credits on subsidiaries’ R&D. We then examine the link between policy-induced R&D from each policy instrument, and subsidiaries’ firm performance in the host country. 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 subsidiaries’ firm performance in the host country, and (3) the differential effects of R&D grants and R&D tax credits. We find that both R&D policy instruments drive subsidiary R&D, and that the policy-induced R&D results in substantial host country improvements in turnover, exports, and value added. Our results suggest several policy implications, particularly for economies pursuing an R&D strategy which targets foreign-owned subsidiaries.

Keywords: Public support for R&D; Foreign-owned subsidiaries; Firm performance; Multinational enterprises (MNEs); R&D grants; R&D tax credits (search for similar items in EconPapers)
JEL-codes: D04 D22 H25 O25 O31 (search for similar items in EconPapers)
Date: 2024
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DOI: 10.1007/s10961-023-09995-9

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