Knowledge diffusion through FDI: Worldwide firm-level evidence

This paper examines how foreign direct investment (FDI) affects cross-border knowledge diffusion by linking firm-level FDI events to patent citations. We assemble a global panel that merges utility patents with project-level greenfield and M&A investments in 60 countries over two decades. Using a new local-projection difference-in-differences methodology, we find that FDI raises bidirectional citation flows between investor and hosts, with stronger effects for greenfield than for M&A. Spillovers are heterogeneous—larger where host absorptive capacity is higher and where investor–host technologies are closer. At the country–industry level, diffusion extends beyond the targeted sector, propagating to technologically related industries and along production input–output linkages. Mode of entry matters: greenfield projects generate robust intra- and inter-industry diffusion, whereas M&A exhibits limited horizontal effects but notable forward (downstream) spillovers consistent with learning-by-using.