Abstract The aim of this paper is to examine the sensitivity of total factor productivity (TFP) to foreign competition in the case of a European country. Using the Olley and Pakes method, we calculate the TFP of Spanish manufacturing firms and study the impact of EU tariffs and the presence of foreign products and imports on TFP at the firm level. Applying the System-GMM method, we find that TFP is negatively impacted by European tariffs, whereas competition in the form of the increased presence of foreign products in the domestic market and firm imports leads to improvements in the TFP. Moreover, these two effects are complementary. We also find evidence of important asymmetries among firms depending on their involvement in foreign markets. Copyright 2009 The Authors. Journal compilation 2009 Blackwell Publishing Ltd.