Many countries promote inward foreign direct investment (FDI) expecting that advanced technology and management skills brought by foreign investors will spill over to domestic firms and increase their productivity However, previous studies cast doubt on the existence of domestic productivity gains due to foreign capital presence. Using panel data on over 170000 Chinese manufacturing firms from 2001 to 2005, this study provides strong evidence that FDI exerts negative erects on domestic firms. Theres no significant advantage for joint ventures over domestically owned firms to avoid the negative influence of foreign presence. These results are robust to different FDI orientation, ownership structure, export status, various geographic scopes, and sub-samples. Technology advantage, production scales and labor market competition are thought to be critical factors that enable foreign firms to crowd out the market share and profit margin of domestic counterparts and finally damage their productivity.　　 Further, higher level of market development, in terms of product market development, factor market development and intellectual property rights (IPR) protection, encourages the competition environment and thus deteriorates the productivity of domestic firms.