Despite the Chinese government s aims to attract FDI in order to build up the domestic economy, FDI s actual impact on entrepreneurship and net firm creation in China remains uncertain. This paper attempts the first national-scale empirical test on FDI s effect on small domestic firms in China. Fixed-effects regressions are run on a comprehensive dataset of 214 prefectures in 1999 and 2003. The analysis shows a significant trade-off between FDI and small domestic firms in 1999 that then turns positive in 2003. The remainder of the paper tests three hypotheses to explain this change in FDI s...