Abstract: The foreign investment behavior of enterprises has undoubtedly created important opportunities and external conditions for the adjustment and rational distribution of China's factor market structure. This paper uses the micro-enterprise data from 2000 to 2009 to construct a dynamic measurement model and examines the impact of corporate external investment behavior on factor market distortion through a two-step system GMM method. The study found that corporate foreign investment behavior effectively reduced the distortion of China's factor market and improved the utilization efficiency of the overall factor resources of the market. The results of market factor decomposition test, IV-2SLS estimation and sample period segmentation test are still robust. This paper further tests the mechanism of foreign investment behavior to the distortion of factor market through the mediation effect model which finds that the foreign investment behavior of enterprises mainly solves the distortion of the factor market in China by accelerating the process of "too excess capacity" and marginal industrial transfer and improving the productivity of domestic enterprises. Large-scale "going out" of enterprises can effectively resolve excess capacity and "return" the domestic market. This is also the reason for seeking new economic growth points of China's new round of reform and opening up.

Key words: foreign direct investment, factor market distortion, system GMM, resource allocation