Using the annual data of Chinese manufacturing firms over the period of 1998–2007, this paper applies the Cox proportional hazards model and analyzes the impact of inter-provincial market segmentation on the exit hazard of firms in China. This study shows that market segmentation increases the risk of enterprises exiting the market in China. Moving from the 10th percentile of the distribution of market segmentation (score of 0.0995) to the 90th percentile (score of 0.7084) would increase the exit probability of firms by 7.5 percentage points. An analysis of the mechanisms involved shows that market segmentation benefits are often outweighed by lower productivity and less incentive to innovate. Our study also demonstrates that inter-provincial market segmentation facilitates the likelihood that state-owned enterprises (SOEs) will survive, but not for non-SOEs in China. A one unit increase in the degree of regional market segmentation will reduce the probability that SOEs withdraw from the market by 19.5% while increasing the probability that non-SOEs will leave the market by 5.80%.