The Impact of Business Environment on FDI Quality Under the Sustainable Development Goals: Evidence from China

Foreign direct investment (FDI), particularly high-quality FDI, serves as a critical driver in achieving the Sustainable Development Goals (SDGs). However, understanding how to enhance FDI quality remains a pressing challenge for policymakers and researchers alike. As a core determinant of FDI quality, the business environment necessitates a thorough examination of its underlying mechanisms. Drawing on provincial-level data and firm-level data from listed foreign-invested enterprises in China spanning 2011 to 2023, this study constructs an FDI quality evaluation index system aligned with the goal of sustainable development at the micro-enterprise level, empirically examines the impact of the business environment on FDI quality. Our findings reveal a consistent upward trajectory in China’s FDI quality throughout the sample period, with the business environment exerting a significantly positive influence. Dimensional decomposition reveals that the government-legal environment and openness to foreign investment demonstrate particularly pronounced positive effects. These effects operate primarily through three mechanisms: stimulating entrepreneurship, accelerating digital transformation, and optimizing supply chain configurations. Moreover, these effects are more pronounced among wholly foreign-owned enterprises, firms with superior knowledge absorption capacity, and those facing higher perceived economic policy uncertainty. Extended analysis further demonstrates that enhanced FDI quality makes substantial contributions to sustainable development outcomes. This study extends the research on FDI quality from the macro level to the micro level, broadening the research perspective of related fields. The conclusions not only furnish robust theoretical evidence on how business environments foster high-quality FDI, but also provide actionable policy insights for countries seeking to optimize their institutional frameworks to attract quality foreign investment in alignment with the SDGs.