Allocation of property rights and technological innovation within firms

Research Summary This paper examines whether ownership rights to strategic assets within firms affects innovation. Although existing research maintains that strategic assets can be leveraged freely within the firm, many firms allocate ownership rights to strategic assets to business units or subsidiaries. While scholars have examined strategic asset ownership rights as a tool for tax avoidance, scholars have yet to study its effects on innovation. In the context of multinational firms, I find evidence that subsidiaries with ownership rights produce more technological innovations and are more responsive to shocks to R&D opportunity than those without ownership rights. Additionally, the results provide evidence of the cost of tax avoidance strategies. When subsidiaries in technologically advantaged locations do not hold ownership rights, they produce fewer and less impactful innovations. Managerial Summary A key decision made by multinational firms is which subsidiaries should hold ownership rights to the firm's strategic assets. The choice often entails a trade-off between allocating ownership rights to subsidiaries best positioned to innovate and manage the strategic asset versus to subsidiaries in income shielding locations to reduce the firm's tax bill. This paper examines whether subsidiary strategic asset ownership rights matter for subsidiary innovation. I find evidence that subsidiaries with ownership rights produce greater quantity and quality of innovations and are more responsive to changes in R&D opportunity than subsidiaries without ownership rights. This study highlights an important ramification of tax avoidance strategies: locating strategic asset ownership rights away from subsidiaries in regions of expertise can adversely affect innovation within the firm.