In this paper, I study the consequences of large capital inflows for aggregate output, aggregate productivity, and resource allocation across firms. Using balance of payment data, I identify capital inflow booms across 85 countries between 1975 and 2019. I show that in the aftermath of such episodes, countries typically experience a large and persistent increase in private credit accompanied by transitory booms in aggregate output, while aggregate productivity (TFP) undergoes a persistent bust. Using firm-level data for 30 countries, I analyze the micro dynamics behind the macro results. I show that, on average, firms experience strong but transitory booms, and that there is a substantial reallocation of capital and debt toward high marginal revenue product of capital (MRPK) firms. Finally, I interpret these findings using a small open economy firm dynamics model with heterogeneity and financial frictions. After matching key moments from the micro data, I simulate a capital inflow boom in the model by feeding a sequence of credit supply increases. Through this experiment, I show that considering general equilibrium adjustments, which affect the entry and exit decisions of firms, is critical for matching the sign of the aggregate TFP response.