Abstract: Based on the time series data of China's foreign investment, industrial structure and urban-rural income gap from 1984 to 2015, using the time-varying parameter state space model and KALMAN filtering algorithm, this paper investigates the dynamic impact of industrial structure and foreign investment on China's urban-rural income gap over time. There is a long-term co-integration relationship between industrial structure and income gap between urban and rural areas. Foreign investment has less impact on income gap between urban and rural areas. It is not the main factor affecting income gap between urban and rural areas in China. Foreign investment has a positive impact on narrowing the income gap between urban and rural areas. The proportion of secondary industry, the level of advanced industrial structure and the income gap between urban and rural areas have a positive impact. There is always a positive correlation between the increase in the proportion of secondary industry and the upgrading of industrial structure, which further aggravates the income gap between urban and rural areas. It is suggested that foreign investment be further used to develop modern agriculture in China, actively develop agricultural industrialization, and actively absorb surplus rural labor into the development of tertiary industry, while improving rural areas. The skills and qualities of migrant workers should be emphasized, and the professional skills training of rural migrant workers should be emphasized so that they can engage in relatively high-income work such as information consultation, business logistics, etc. Policies should be formulated to attract high-quality talents to stay in the countryside, improve the level of modern agricultural production in China, effectively improve the income level of rural residents, and achieve sustainable development. Continue to narrow the income gap between urban and rural areas.

Key words: foreign investment, industrial structure, urban and rural income, state space model