We adopt the framework of Schumpeterian creative destruction formalized by Aghion et
al. (2009) to analyze the impact of foreign entry on the productivity growth of domestic
firms. In the face of foreign entry, domestic firms exhibit heterogeneous patterns of
growth depending on their technological distance from foreign firms. Domestic firms
with smaller technological distance from their foreign counterparts tend to experience
faster productivity growth, while firms with larger technological distance tend to lag
further behind. We test this hypothesis using a unique firm-level data of Chinese
manufacturing. Our empirical results confirm that foreign entry indeed generates strong
heterogeneous growth patterns among domestic firms.
