Theoretical research shows that competition has positive effects on productivity, for companies that are initially efficient, but not for unproductive firms. Our empirical analysis on a panel data of Czech companies, years 1995–2004, confirms this result. In addition, our analysis shows that when economic reforms affect both domestic and foreign competition, controlling for domestic competition is crucial when assessing the impact of trade liberalization. Otherwise, the effect of trade liberalization on firm productivity is upward biased.