BRAZILIAN INNOVATION TAX POLICY AND INTERNATIONAL INVESTMENT: EVIDENCE FROM UNITED STATES MULTINATIONALS AND INTERNATIONAL PATENT APPLICATIONS

Abstract

In the last decades, multinational enterprises (MNEs) have increasedtheir internationalization levels of innovation activities. Brazil has benefited fromsuch changes and received increasing investment from MNEs. In 2005, the federalgovernment approved new tax incentives (Law 11,196/05) to foster business innovationin the country by reducing the tax cost of research and development (R&D) activities.This paper investigates whether these tax breaks have attracted ‘footloose R&D’,diverting international investment from other economies. After a literature reviewon locational factors for R&D attraction and an analysis of the Brazilian case, aneconometric model is presented, using data on R&D investment by U.S. MNEs andpriority patent applications. No evidence that Brazilian tax incentives have attractedinternational R&D from alternative host countries is found. This result is in accordancewith previous research suggesting international R&D performed in Brazil is mainlyadaptive and support-oriented and, for this reason, tax incentives are not a primaryattraction factor. It also suggests that claims that international fiscal competition lead toa zero-sum game may be unfounded for the Brazilian case.