Although the phenomenon of spatial agglomeration and its associated productivity premium applies to many industries, scholars have only recently considered agglomeration in the tourism industry. To avoid overestimation of the agglomeration effect and provide strong empirical evidence for policy formulation related to productivity improvement, we develop a theoretical framework to identify and decompose the contributions of spatial agglomeration to the productivity of hotel and catering enterprises. Using (Abel & Deitz, 2015) Chinese firm-level data for the hotel and catering industry from China's Second National Economic Census in 2008 and (Ahlfeldt & Pietrostefani, 2019) data from the 2007–2011 China Tax Census and 2009–2014 China Key Tax Source Survey, this study finds (Abel & Deitz, 2015) obvious agglomeration effects in the hotel and catering industry and that spatial agglomeration improves the average productivity of such enterprises in large cities; (Ahlfeldt & Pietrostefani, 2019) the competition is more fierce for hotels and catering enterprises in big cities, with high-productivity companies benefitting and low-productivity businesses suffering; (Andersson et al., 2007) low-productivity hotel and catering enterprises in big cities flee to smaller cities, that is, there is a clear sorting effect and (Au & Henderson, 2006) some high-productivity enterprises in big cities have migrated to small cities, indicating negative selection effects. The results of robustness tests validate these conclusions. •This paper uses the hotel and catering industry (HCI) data from China for study.•The agglomeration effect attributes to HCI's productivity premium in big cities.•High-productivity companies benefit from the fierce competition in big cities.•Low-productivity enterprises in large cities choose to flee to small cities.•Some high-productivity enterprises in the big cities relocate to small cities.