This study investigates whether foreign direct investment (FDI) by a multinational corporation increases the likelihood that knowledge about new technologies and production processes will be exchanged between foreign and domestic firms. This could be an important channel for knowledge diffusion since such flows have proven to be highly geographically localized. I develop a framework for measuring the degree to which the close proximity of a multinational subsidiary can enhance flows of knowledge between firms of different countries. I use an original data set on the innovative activity of firms of more than 30 countries and find a strong positive effect of both inward and outward FDI on knowledge flows. Interestingly, I find that countries that are technological followers gain three times as much knowledge from inward FDI as leaders.