The export of enterprises not only depends on the relationship between supply and demand in the international market, but also is affected by the domestic market environment. The resource mismatch caused by the distortion of factor prices will have a negative impact on the export enterprises, and then undermine their export competitiveness. However, the existing literature is less likely to examine the effects of factor price distortions on the export competitiveness of enterprises and their transmission mechanisms. In particular, empirical analysis is lacking. This paper analyzes the relationship between factor price distortion and the export competitiveness of enterprises by constructing a theoretical framework including “distortion tax”. It is argued that factor price distortions will hinder resource reallocation among enterprises, weaken the efficiency improvement effect of replacement competition, prevent a large number of inefficient enterprises from clearing the market, and also inhibit technological innovation behavior of enterprises, which will not help enterprises to improve export competitiveness through efficiency improvement and technological progress. Meanwhile, the local market effect, demand-induced innovation effect and economic agglomeration effect generated by domestic demand growth not only promote the export competitiveness of enterprises, but also weaken the negative impact of factor price distortion on the export competitiveness of enterprises. Based on the analysis of the data of China’s industrial enterprises from 1999 to 2007 and listed companies from 2007 to 2020, it is found that the degree of factor price distortions (including capital price distortions and labor price distortions) of enterprises and their export competitiveness are significantly and negatively correlated. Meanwhile, the degree of factor price distortion is negatively correlated with the probability of market exit and technological innovation of enterprises, indicating that factor price distortion will significantly inhibit the improvement of export competitiveness of enterprises, and there is a transmission path to hinder the market exit of inefficient enterprises and inhibit the technological innovation of enterprises; the growth of domestic demand has a positive impact on the export competitiveness of enterprises, and can significantly weaken the inhibiting effect of factor price distortions on the improvement of export competitiveness of enterprises; the negative impact of factor price distortions on the export competitiveness of enterprises is characterized by firm heterogeneity and regional heterogeneity, which shows that the capital price distortion has a more significant impact on foreign-funded enterprises and state-owned enterprises with lower financing constraints (compared with private enterprises). The labor price distortion has a more significant impact on private enterprises and foreign-funded enterprises with a lower share of labor compensation (compared with state-owned enterprises), and factor price distortions have a more significant impact on enterprises in less market-oriented regions; in addition, labor price distortion has a greater negative impact on enterprises’ export competitiveness than capital price distortion. Compared with previous literature, this paper expands and deepens the research on the economic effects of factor price distortions and the factors influencing the export competitiveness of enterprises, and provides new ideas for a deeper understanding of the relationship between factor price distortions and the export competitiveness of enterprises from the perspective of domestic demand growth. It also provides empirical evidence for the inhibiting effect of factor price distortion on enterprises’ export competitiveness and its micro-mechanism. According to the findings of this paper, all regions should continue to deepen market-oriented reforms in various fields, accelerate the construction of a large national unified market, implement the strategy of expanding domestic demand, effectively alleviate the financing constraints of various micro-economic entities (especially private enterprises), and continuously increase the share of labor compensation in the initial distribution.