Despite a large number of studies examining the MNCs' horizontal spillover effect in host country, the empirical results are mixed. We argued the mixed results come from the ignorance of the fact that different categories of organizations may react to MNCs using different strategic choices. To reconcile the conflicts and give a proper evaluation of MNCs' spillover effect in establishing new practice, we draw on the concept of organization identity to differentiate two identity groups among Chinese auditing firms. We then examine how the foreign auditing firms' horizontal spillovers on establishing new audit practice are contingent on domestic auditing firms' group identity. We find that the presence of foreign auditing firms in China has positive horizontal spillovers on upgrading-status domestic auditors' audit quality, while negative horizontal spillovers on low-status domestic auditors' audit quality. The findings contribute to literature on spillover effect and institutional theory in two ways. First, we show that prior studies overestimate the spillover effect of foreign firms on domestic firms due to lack of subpopulation-based approach. Second, we note the identity as a valid contingent factor in reconciling the inconsistency in institutional spillover effect on domestic firms.