A UC Riverside study found that large corporate tax subsidies were associated with increased patenting among nearby businesses. Researchers examined 115 subsidy deals and found that larger incentives correlated with higher patent activity at the county level, providing evidence that innovation effects can extend beyond the companies receiving the incentives.
Key Takeaways
- UC Riverside researchers examined 115 large tax subsidy deals approved between 1990 and 2014.
- Subsidies worth more than $50 million were classified as “Megadeals.”
- A substantial increase in subsidy size was associated with a 3.3% to 4.9% increase in nearby patent filings.
- The researchers estimated that the increase represented roughly two to three additional patents annually at the county level.
- The study found evidence of knowledge spillovers through skilled workers, technological expertise and workforce training.
UC Riverside Researchers Examine Large Corporate Tax Subsidies
California tax incentives are part of a broader subject examined by a new UC Riverside study that found large corporate subsidies were associated with higher patent activity among nearby businesses. The research was co-authored by Aruhn Venkat, an assistant professor of accounting at UC Riverside’s School of Business.
The study examined large tax incentive packages known as “Megadeals,” defined by the researchers as subsidies worth more than $50 million. Researchers analyzed 115 Megadeals approved between 1990 and 2014 to determine whether the incentives were associated with innovation among businesses located in the same counties.
The research measured innovation through the number and value of patents filed by businesses in counties where the subsidies were awarded. The analysis found that businesses outside the companies receiving the subsidies also recorded increased patent activity.
Venkat said the researchers found more positive patenting among local firms in counties where a Megadeal had been awarded.
The study was co-authored by Yoojin Lee, an associate professor of accounting at Cal State Long Beach, and Shaphan Ng, an assistant professor of accounting at Singapore Management University. The research was published in the Journal of Accounting Research under the title “Megadeal Subsidies, Local Spillovers and Corporate Innovation.”
The findings focus on innovation occurring beyond the companies that receive the tax subsidies. That distinction is central to the study because tax incentive agreements are designed to attract major corporate facilities, investment and employment to specific communities.
The findings also provide research relevant to discussions of California’s economic outlook, where employment growth and broader economic conditions are tracked through state forecasts and labor-market data.
Study Tracks Patent Activity Around Subsidized Businesses
The researchers used patent filings to examine whether the arrival of a subsidized company was associated with changes in innovation among other local businesses.
The study found that a substantial increase in subsidy size was associated with a 3.3% to 4.9% increase in patent filings by nearby companies. At the county level, the researchers estimated that this increase represented approximately two to three additional patents each year.
The analysis also considered the value of patents rather than looking only at the number filed. This allowed researchers to examine local innovation through both patent activity and the value associated with those filings.
The 115 Megadeals in the study covered subsidies approved over a period extending from 1990 through 2014. The researchers used those deals to assess whether large corporate incentives were associated with innovation among other businesses in the same geographic areas.
The findings indicate an association between larger subsidy packages and local patent activity. They do not establish that every business located near a subsidized company will increase its innovation activity.
The research instead identifies an average relationship across the Megadeals examined. Venkat said the innovation effects did not occur after every deal but occurred for the average Megadeal included in the analysis.
The distinction matters because the study examines a specific group of large subsidy agreements rather than all corporate tax incentives. Its findings therefore concern large incentive packages meeting the researchers’ Megadeal definition.
Research into California’s technology sector also shows the state’s universities, companies and startup communities operating within a large innovation economy, including activity documented in California technology research.
Larger Tax Incentives Correlate With Higher Local Patent Filings
The research found that innovation can spread beyond the company receiving a large subsidy through the movement of skilled employees and technical knowledge.
A large company entering a region can employ workers with specialized expertise. Some of those workers may later move to other local businesses or establish companies of their own. Their experience at the subsidized business can then be applied to different products, technologies or business problems.
The study identified this movement of knowledge as one possible source of local innovation associated with Megadeals.
The researchers also found evidence involving technological expertise and new ideas entering a region through the subsidized operation. Local companies can gain access to knowledge when employees move between businesses or when technical expertise becomes available to a wider group of workers.
The study also examined workforce training as another potential channel for knowledge spillovers.
Some tax incentive agreements require participating companies to work with community colleges to develop training programs for technical skills needed by the subsidized businesses. Workers who receive that training do not necessarily remain with the company that helped develop the training.
Those workers can take their skills to other employers or use them when establishing businesses of their own. The resulting pool of trained workers can provide expertise to companies beyond the original recipient of the subsidy.
The research therefore connects local patent activity with several potential forms of knowledge transfer, including employee movement, technical expertise and workforce training.
The relationship between research institutions and innovation is also visible in other California university developments, including recent UC Riverside research funding supporting scientific work at the university.
Skilled Workers and Expertise Drive Local Knowledge Spillovers
One example discussed in the study involves Tesla’s battery factory near Reno, Nevada.
In 2014, Nevada approved $1.3 billion in tax subsidies for Tesla. The company built a $5 billion battery factory known as the Gigafactory in the region.
Venkat said former Tesla engineers later left the battery factory to establish businesses focused on recycling battery materials. According to Venkat, those engineers had developed ideas for recovering and reusing lithium from spent batteries.
The example illustrates the type of knowledge transfer examined by the researchers. Technical expertise developed within a subsidized company can move with employees when they leave for other businesses or establish companies of their own.
The study also identifies potential spillovers between major companies and other firms operating in the same area. Knowledge developed at a large operation can provide local workers with technical experience that can later be applied elsewhere.
Workforce training provides another pathway. When companies work with community colleges to develop technical training, workers who receive those skills can subsequently use them outside the original employer.
These mechanisms provide possible explanations for the higher patent activity observed among local firms in counties with Megadeals. The study’s statistical findings connect larger subsidies with increased patent filings, while the workforce and knowledge findings provide evidence about how those effects can spread.
Researchers Caution Against Broad Cost-Benefit Conclusions
The UC Riverside study does not present the innovation findings as a comprehensive assessment of corporate tax subsidies.
Venkat said the research was not intended to determine whether Megadeals produce enough overall public benefits to justify their costs. The study instead examined an additional outcome that can be considered when evaluating large tax subsidy agreements.
Previous research examining outcomes such as employment and business formation has often found limited benefits from these types of incentives, according to Venkat. The new study adds patent activity and local innovation to the set of outcomes that can be examined.
The researchers also caution that the innovation effects identified in the study do not follow every Megadeal. The findings describe an average result across the subsidy agreements examined.
That distinction limits the scope of the findings. A large tax incentive does not automatically produce additional patents among nearby companies, and the study does not establish that every community receiving a Megadeal will experience the same outcome.
The research instead provides evidence that the effects of large subsidies can extend beyond the recipient company. Skilled workers, technical expertise and workforce training can create channels through which knowledge reaches other businesses in the same region.
For policymakers evaluating California tax incentives and similar corporate subsidy arrangements, the study identifies local patent activity as one measurable outcome associated with large incentive packages. Its findings do not resolve the broader cost-benefit question, but they provide additional evidence about how innovation can occur outside the companies receiving the subsidies.
Frequently Asked Questions
What did the UC Riverside tax incentive study find?
The study found that large corporate tax subsidies were associated with increased patent filings by nearby businesses. Researchers identified a 3.3% to 4.9% increase in patent filings associated with a substantial increase in subsidy size.
How did researchers measure local innovation?
Researchers examined the number and value of patents filed by businesses in counties where large subsidies were awarded. The analysis covered 115 Megadeals approved between 1990 and 2014.
What qualifies as a Megadeal tax subsidy?
The study defines a Megadeal as a large tax subsidy worth more than $50 million. Researchers examined 115 such deals approved between 1990 and 2014.
How were tax subsidies linked to local patent activity?
The study found an association between larger subsidy packages and higher patent filings among nearby businesses. Researchers identified skilled-worker movement, technological expertise and workforce training as potential channels for knowledge spillovers.
Did the study find that every tax incentive produces innovation?
No. The research found that innovation benefits occurred on average among the Megadeals examined. It did not find that every large tax subsidy produces increased innovation.
