Foreign Firms, Distribution of Income, and the Welfare of Developing Countries

I construct a tractable model to investigate the impact of the presence of foreign firms in economies where there exist financial frictions. The cross-country implications of the model are consistent with two facts that I document using plant-level data: (i) foreign firms enter more in economies where domestic entrepreneurs are more financially constrained. (ii) the impact of foreign firms in the plants’ size distribution of the host country is larger in countries where domestic entrepreneurs are more financially constrained. After calibrating the model to account quantitatively for these facts, I use it to evaluate a decrease of barriers to foreign entry. I find that welfare increase only in economies with sufficiently high level of labor income share.