Thinking inside the box: Optimal policy towards a footloose R&D‐intensive firm

We derive the optimal policy mix of Research and Development (R&D)‐subsidies and corporate tax rates towards a footloose R&D‐intensive firm. Increasing R&D‐subsidies strengthens the firm's incentive to offshore production. The firm's home government can offset this by offering an appropriate corporate tax concession. The optimal policy package exhibits a “Matthew principle”: higher R&D‐subsidies should typically be accompanied by lower tax rates. However, if the R&D‐subsidy exceeds a crucial threshold, a tax concession can no longer prevent offshoring. We find that it is never optimal to raise tax rates as R&D‐subsidies increase.