The Impact of Foreign Direct Investment and Environmental Regulation on Urban Sustainable Competitiveness: Evidence from Chinese Cities

Foreign direct investment (FDI), as a key driver of global factor mobility, significantly influences urban sustainable competitiveness (USC). This study investigates whether FDI can enhance USC amid potential environmental externalities and the moderating role of environmental regulation. Using panel data from 281 Chinese cities (2012–2020), we employ fixed-effects regression models with quadratic terms to capture the nonlinear relationship between FDI and USC. Our empirical analysis finds an inverted U-shaped relationship between FDI and USC, where FDI boosts USC up to a threshold beyond which its impact turns negative, aligning with the pollution haven hypothesis. Notably, environmental regulation moderates this relationship, with lax regulation enhancing FDI’s positive effects more effectively than strict policies. Regionally, this threshold effect is pronounced in China’s eastern cities but is less significant in the northeastern, central, and western regions due to limited FDI inflows. These findings offer essential insights for policymakers: implementing balanced environmental regulations can optimize FDI’s contributions, encouraging high-quality, sustainable investment that strengthens USC.