We examine the impact of Chinese import competition on patenting, IT, R&D, and TFP using a panel of up to half a million firms over 1996–2007 across twelve European countries. We correct for endogeneity using the removal of product-specific quotas following China’s entry into the World Trade Organization. Chinese import competition had two effects: first, it led to increases in R&D, patenting, IT, and TFP within firms; and second it reallocated employment between firms towards more innovative and technologically advanced firms. These within and between effects were about equal in magnitude, and appear to account for around 15% of European technology upgrading between 2000–2007. Rising Chinese import competition also led to falls in employment, profits, prices, and the skill share. By contrast, import competition from developed countries had no effect on innovation. We develop a simple “trapped factor” model of innovation that is consistent with these empirical findings.