In this paper, I explore a novel channel through which countries can benefit from FDI: the presence of foreign firms can diminish the misallocation of resources caused by the existence of domestic distortions. Borrowing from their home countries, foreign firms are isolated from domestic financial frictions and hence achieve optimal size. Then, the higher the presence of foreign firms, the lower the amount of domestic factors allocated to small unproductive domestic firms. I show that in cross-country data, foreign ownership explains a sizeable fraction of variation in plant size distribution. In particular, it is associated to a lower share of employment accounted by small plants, and this association is magnified in countries where financial frictions are large. Then, I write a model where foreign firms can enter in a small open economy. I assume that domestic firms are financially constrained and foreign firms can borrow from abroad and hence are not affected by domestic financial frictions. I calibrate the model to account for the cross-country empirical findings and I use it to quantify the effects of a policy of openness. I find that lowering barriers to foreign entry increases aggregate income and productivity in all economies. However, national income and hence consumption and welfare increases only in economies with a high level of financial frictions. After the openness, domestic labor income increases due to higher wages, and domestic entrepreneurial income decreases due to stronger foreign competition. In economies where financial frictions are low, a high proportion of the income used for consumption comes from domestic entrepreneurial profits. National income falls when the increase in labor income is not high enough to compensate the decrease in entrepreneurial profits.