Under the background of China’s accelerating high-quality development, whether expanding domestic demand can promote the improvement of the core competitiveness of local enterprises is still lacking support of theoretical and empirical evidence. Using micro-data at the level of Chinese industrial enterprises, this paper empirically examines the impact mechanism and effect of domestic market demand on the enhancement of local enterprises’ core competitiveness. The research shows the following three findings. First, domestic market demand will help local enterprises to increase investment in R&D and design and brand marketing, so as to promote value-added activities to shift from tangible activities in production to intangible activities before and after production, thereby improving their own core competitiveness. Second, further deconstructing market competition factors from the perspective of ownership shows that, driven by domestic market demand, non-state-owned enterprises can enhance their core competitiveness better than state-owned enterprises. Third, China’s regional industrial distribution and development have the typical echelon characteristics, which leads to the geographical heterogeneity of the promotion effect of domestic market demand on the local enterprises to enhance their core competitiveness, showing a ladder-type declining trend from the east to the middle and then to the west. These findings provide a useful decision-making reference for better implementation of the strategy of expanding domestic demand under the background of accelerating the construction of a new development pattern.