Taxes and the Global Spillovers of AI Investments

Artificial Intelligence (AI) is transforming business operations and global markets, yet little is known about how AI investments spill over across borders. Using a novel panel dataset, we examine the international propagation of U.S. firms’ AI investments and find that AI investment strongly predicts growth in foreign subsidiaries’ assets, employment, and revenues. We construct a measure of European country industry exposure to U.S. firms’ AI investments and document significant spillovers of U.S.-originating AI investment into European industries. However, these effects vary with local tax policies: European countries with attractive R&D tax incentives experience faster, larger AI-driven growth, while low corporate tax rates further amplify revenue spillovers. Additional tests exploiting variation within U.S. firms across their foreign subsidiaries suggest these spillovers occur because U.S. firms expand capital inputs, output, labor productivity, and market presence, particularly in foreign markets with attractive corporate tax regimes, following AI adoption. Our findings highlight the role of fiscal policy in shaping AI diffusion and offer new insights into how digital era investments influence global economic growth.