Banking Competition and FDI in China: Unveiling an Inverse U-Shaped Effect

This study empirically examines the nonlinear impact of banking competition on foreign direct investment (FDI) and its underlying mechanisms by matching foreign-invested enterprise registration records with city-level bank branch data in China. The main findings are as follows: (1) Banking competition demonstrates a significant inverse U-shaped relationship with FDI inflows. Moderate competition attracts FDI by expanding credit supply to alleviate corporate financing constraints, whereas excessive competition exacerbates non-performing loan risk accumulation, ultimately crowding out FDI. Financial regulation exhibits a negative moderating effect during risk accumulation, mitigating the adverse impacts of excessive competition. (2) Heterogeneity analysis reveals that this nonlinear effect features lower competition thresholds in eastern coastal regions, cities with larger market sizes, and finance-oriented cities. The effect is more pronounced in cities with lower market openness and capital-intensive industries, but insignificant in human capital-intensive sectors. Competition between state-owned banks and city commercial banks emerges as the dominant driver of this phenomenon. The research offers new perspectives for emerging economies, particularly those with bank-dominated financial systems, to coordinate financial stability and openness.