R&D Grant and Tax Credit Support for Foreign-Owned Subsidiaries: Does It Pay Off?

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.

Lenihan, Helena, Kevin Mulligan, Justin Doran, Christian Rammer and Olubunmi Ipinnaiye (2022), R&D Grant and Tax Credit Support for Foreign-Owned Subsidiaries: Does It Pay Off?, ZEW Discussion Paper No. 22-003, Mannheim.