The large regional variation in minimum wage levels during the period 2002–8 in China implies that Chinese manufacturing firms experienced competitive shocks as a function of firm location and their lowwage employment share.We find that minimum wage hikes accelerate the input substitution from labour to capital, reduce employment growth and accelerate total factor productivity growth—particularly among the less productive firms under private Chinese or foreign ownership, but not among state-owned enterprises. The heterogeneous firm response to labour cost shocks can be explained by differences in management practices and suggests that management quality and competitive pressure are complementary.