University

We present evidence that the level of \u85nancial development in FDI recipient countries system-atically a¤ects the spatial distribution of multinational corporations(MNCs) sales. Using detailed proprietary survey data collected by the Bureau of Economic Analysis (BEA) on US multinational activity abroad, we \u85nd that stronger \u85nancial development in the host country has a negative e¤ect on the share of MNC a ¢ liate sales that remain in the host country, indicating a reduced propensity towards horizontal FDI. Conversely, the share of a ¢ liate sales that is re-exported to third-country destinations increases, suggesting an increased propensity towards export-platform FDI. We provide a three-country model with heterogenous \u85rms that rationalizes these observa-tions: More \u85nancially developed host countries foster entry by domestic \u85rms, making the local market more competitive for MNC products. This leads MNCs to orient their a ¢ liates away from servicing the local market towards third-country markets instead. JEL classi\u85cation: F12, F23, G20