Foreign Profitability and the Rising Foreign R&D of U.S. Multinational Corporations

Lisa De Simone, Jing Huang and Linda Krull
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Lisa De Simone: Stanford University
Jing Huang: VPI
Linda Krull: University of OR

Research Papers from Stanford University, Graduate School of Business

Abstract: We investigate how R&D contributes to foreign profit margins in U.S. multinational corporations (MNCs) through wage savings and income shifting. Our research question is timely and important given rising foreign R&D investments and recent scrutiny by tax authorities and policy makers of the use of intangibles to avoid corporate income taxes. Using public data, our results suggest that although wage savings increase foreign margins attributable to foreign R&D activities, the shifting of income attributable to domestic R&D activities to lower-tax jurisdictions has a larger magnitude impact on foreign profit margins. Additional tests confirm that income shifting from domestic R&D is concentrated in firms with high-value patents, patents with low risk of expropriation, financially unconstrained firms, and in years following the implementation of the check-the-box regulations. Our evidence sheds light on the importance of R&D locations in corporate intangible income shifting that separates the location of economic activity from the location of reported taxable income.

Date: 2016-07
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