What are the welfare effects of foreign multinational enterprises (MNEs) in an economy with distortions? First, we leverage rich microdata on all establishments in Mexico from 1994 to 2019, including informal ones and foreign MNEs within and outside the maquila program. We construct direct measures of distortions such as the burden of crime and corruption, and imperfectly enforced labour taxes. On average, domestic formal establishments face higher distortions than informal ones, while maquila MNEs are the least distorted formal establishments. Distortions vary significantly across commuting zones (CZs). Second, using an instrumental variable strategy, we find that one additional MNE worker per capita in a CZ raises domestic employment by 0.33, mainly in formal establishments, thereby lowering the local informal employment share. Non-maquila MNEs drive the positive effects on the local economy. Third, we develop a general equilibrium (GE) model showing how distortions can amplify or attenuate the welfare gains from foreign MNEs. We use the IV estimates and initial distortion measures to calibrate the model and quantify the GE effects of foreign MNEs. Simulating a 10% MNE productivity boost in CZs with 1994-2019 MNE growth, we find a 6% aggregate welfare gain from MNEs—explained 25% by reallocation and 20% by local spillovers