“Megadeal” Subsidies, Local Spillovers, and Corporate Innovation

ABSTRACT We examine whether the largest place‐based, firm‐specific corporate subsidies (“Megadeals”) awarded by state and local governments affect local firms’ innovation. First, we document that (1) subsidy firms innovate in the subsidized county and (2) subsidy firms bring inventors from other counties into the subsidized county, consistent with subsidy firms generating new knowledge locally. In our main test, we use a stacked cohort design with stringent fixed effects to document that local firms increase patenting following a Megadeal. Cross‐sectionally, effects are increasing (1) in subsidy firm innovativeness, (2) in the technological closeness of subsidy firms and local firms, (3) when subsidy and local firms share an industry, and (4) when the subsidized location has a heavy college presence. Additionally, we document that following a Megadeal, local firms increasingly make citations to subsidy firm patents and that the patent similarity of local and subsidy firms increases. We document that subsidy firm inventors are more likely to move to local firms following a Megadeal. We also find that subsidies for labs, headquarters, and high‐tech manufacturing plants drive our main results. These results are consistent with knowledge spillovers being one channel through which we observe an increase in local firm patenting following Megadeals.