This paper studies the role of the soft budget constraint in shaping firm dynamics and long-run economic growth. We develop a Schumpeterian model with two sectors: consumption and investment, and two types of firms: state-owned enterprises (SOEs) and privately owned enterprises (POEs). Within this framework, multi-product firms require fixed inputs of investment goods to operate — a resource that is also crucial for firm expansion, and the soft budget constraint allows subsidized firms to continue operating on loss-making product lines. This distortion raises the price of investment goods, suppresses firm dynamics, and dampens aggregate growth. To quantify the mechanism, the model is calibrated using Chinese firm-level data. Our quantitative exercise shows that eliminating the SOE soft budget constraint friction reduces the price of investment goods by 9.82 percent, increases the overall TFP growth rate by 0.12 percentage points, and generates a welfare gain of 4.94 percent.