The Geography of R&D and the Onshoring of Innovation: Evidence from TCJA Section 174

Can a tax penalty on foreign R&D bring innovation home? Beginning in 2022, amended Section 174 required U.S. firms to amortize domestic R&D over five years and foreign R&D over fifteen years, creating a differential user-cost shock that made foreign research especially costly. We study this shock using U.S. patent-application data linked to Compustat, comparing firms with high and low pre-policy foreign-inventor exposure. Firms with greater foreign-inventor exposure reduce R&D intensity by 1.3 percentage points of assets, or about 13% of the sample mean, and reduce total inventor headcount by 13–16% relative to control firms. The contraction is concentrated in foreign-linked innovation: international inventor teams decline by 18–22%, cross-border collaborative teams also contract, and domestic-only inventor teams show no offsetting expansion. Among the international inventors who remain, patent applications per inventor rise, consistent with firms cutting lower-output foreign projects rather than moving those projects to domestic teams. A calibrated model of domestic and foreign R&D allocation disciplines this interpretation: successful onshoring requires a high elasticity of substitution between inventive inputs, while the reduced-form estimates and model calibration point instead to complementarity. The results show that tax rules favoring domestic R&D do not automatically onshore innovation: when domestic and foreign inventors are complements, penalizing the foreign input can reduce cross-border knowledge production without creating domestic gains.

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Bowen, D.E., Farre-Mensa, J., Stein, L.C.D, 2026. The Geography of R&D and the Onshoring of Innovation: Evidence from TCJA Section 174 (Working Paper).