0 Foreign Entry, Competition and Heterogeneous Growth of Firms: Do we observe “creative destruction ” in China?

For review and comments only In the face of foreign entry, domestic firms may exhibit heterogeneous patterns of response depending on their technological distance from foreign firms. Domestic firms closer to the foreign technology frontier may choose to compete, while firms that are further down on the technology ladder may suffer a “discouragement effect ” and lag further behind. In this paper, we test the Schumpeterian idea of “creative destruction” using firm-level data from China’s Large and Medium-Size Enterprise (LME) dataset. We find that foreign entry indeed has a heterogeneous impact on the productivity growth of domestic incumbents. Furthermore, we show evidence that foreign-entry also induces a similar heterogeneous pattern in domestic firms ’ innovation-related activities