Abstract: Although the policy of“invigorating large enterprises while relaxing control over small ones and strictly control the entrance”during the process of the reform of state-owned enterprises has improved the productivity of the state-owned sector, however, under the system of dual ownership, there exists distortion of larger degree in the process of enterprise dynamic replacement and its market selection effect, learning effect, and competition effect in China’s whole economy. By using the micro data of China’s manufacturing industry, this paper conducts an empirical analysis. The results show that: (1) the ownership discrimination has reduced the market entry rate of private enterprises and increased its exit rate, thus distorted the process of enterprise dynamic substitution; (2) the private firms with higher TFP have been eliminated by the state-owned firms with lower TFP, i.e., a large number of“zombie”state-owned firms under the dual ownership structure has destroyed the market selection effect of enterprise dynamic substitution; (3) the newly entered private firms have achieved rapid growth of TFP through learning effect, while the newly entered state-owned firms have clear backward effect; (4) the competition effect brought forward by enterprise replacement is only effective in the private firms, not in the state-owned ones.

Key words: ownership; firms entry and exit; extensive resource misallocation; TFP