The short answer is no. Dropdown formfields cannot be included in a mailmerge. There are macro-based workarounds, though (eg: http://support.microsoft.com/kb/286841). Even then, you'll have the problem that every dropdown in the mailmerge output document will need a different bookmark name - and the corresponding REF field (you need to use {REF Type} not just {Type}) will also need to refer to that unique name, not simply to 'Type'.

Of course, if you create a 'Type' field and another field for the options in your second dropdown in your data source, you can output the conditional text as part of the mailmerge process, without needing either dropdown.

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Cheers,
Paul Edstein
[Fmr MS MVP - Word]