["Economic Inquiry, EarlyView. ", "\nAbstract\nThis study presents an empirical investigation regarding the role of business dynamism (BD) in driving economic development. The results reveal that BD has an escape‐competition (positive) effect and the Schumpeterian (negative) effect on incumbent firms. Mechanism analysis indicates that market competition, innovation intensity, and knowledge spillover are the channels through which BD affects incumbent firms. Moreover, the impact of reallocation is heterogeneous among city's market entry barriers and enterprise type. A decomposition analysis demonstrates that the contribution of BD to incumbents' aggregate productivity growth exhibits a steady increase over time, and this decomposition result aligns with theoretical predictions.\n"]