The Effect of Innovation Box Regimes on Investment and Employment Activity

We study whether innovation box tax incentives, which reduce tax rates on innovation-related income, are associated with increased fixed asset investment and employment. Using a stacked cohort difference-in-differences design on an entropy-balanced sample of European multinationals, we find innovation box regimes are associated with higher levels of capital expenditures but lower levels of compensation expense and number of employees relative to companies in countries without such regimes. However, additional tests suggest patent-owning observations in innovation box countries have a more highly-compensated workforce following innovation box implementation. Our study contributes to the literature on, and policy evaluation of, innovation box regimes by examining the extent to which these incentives result in tangible investment and employment and by identifying how different characteristics of innovation box regimes impact these outcomes.