Yang X.Zhang M.Ma Y.Dhar B.Jiang Z.Mahidol University2026-03-132026-03-132026-01-01Business Strategy and the Environment (2026)09644733https://repository.li.mahidol.ac.th/handle/123456789/115656This study examines whether China's Carbon Emissions Trading Policy (CETP) influences foreign direct investment (FDI) under staggered policy adoption. Using panel data for 260 cities from 2005 to 2021 and a two-way fixed-effects difference-in-differences (DID) approach supported by event-study pre-trend tests, the results show that CETP is associated with a statistically significant increase in FDI inflows. Treating carbon-market features as continuous treatments indicates that higher carbon-price levels and stronger market liquidity reinforce these effects. To clarify the underlying mechanisms, formal mediation using lagged R&D intensity and green patent applications demonstrates a significant innovation-driven transmission channel. Heterogeneity analysis further shows that the policy impact is stronger in eastern and first-/second-tier cities, consistent with higher institutional capacity and more developed market environments. Comparative insights with the EU ETS and K-ETS suggest that price credibility and market depth are important conditions for investment responses. Overall, the findings provide evidence that CETP can shape cross-border investment behavior and support the development of innovation-oriented, low-carbon growth pathways.Environmental ScienceBusiness, Management and AccountingSocial SciencesArticleSCOPUS10.1002/bse.705602-s2.0-10503191916310990836