Does the structure of multinational enterprises' activity affect technology spillovers?

We examine how the structure of multinational enterprises; (MNEs) activity affects technology spillovers between MNEs and their host economies by using firm-level data of Japanese MNEs and patent citations data. We construct new measures of foreign direct investment (FDI) by exploiting information on sales and purchases of foreign affiliates of MNEs. Pure horizontal (vertical) FDI is defined as FDI with a high share of transactions (i.e., both purchases of inputs and sales of outputs) in the local market (with the home country). Partially horizontal and vertical FDI are also defined. We then estimate the effects of these types of FDI on technology spillovers captured by patent citations. Our findings reveal that when developed economies host Japanese MNEs, pure vertical FDI has significantly positive effects on technology spillovers in both directions. When developing economies host Japanese MNEs, by contrast, no form of FDI significantly facilitates technology spillovers in either direction.