The Effect of Artificial Intelligence in Smart Cities on Foreign Direct Investment

Artificial intelligence (AI) is increasingly becoming part of the infrastructure through which modern cities organize economic activity, deliver public services, and compete for investment. At the same time, foreign direct investment (FDI) remains an important source of capital, employment, technology transfer, and integration into global value chains. This paper examines how AI-enabled smart-city development can influence the attraction and quality of FDI. Drawing on the literature on smart cities, international business, innovation, and location advantages, the paper develops a conceptual framework linking AI development with FDI through five main mechanisms: improvements in the business environment, digital infrastructure, innovation capacity, digital human capital, and digital financial development. Existing empirical evidence provides support for this relationship. Research on Chinese cities shows that smart-city development can improve the quality of FDI, while more recent evidence from 290 Chinese cities indicates that intelligent development can attract FDI through digital human capital, regional innovation, and digital financial inclusion (Ye et al., 2021; Does Intelligent Development Attract Foreign Direct Investment, 2026). Evidence from OECD countries also suggests that newly funded AI firms are positively associated with FDI flows (Grigoriadi, 2026). At the international level, recent evidence indicates that AI-related digital infrastructure has become an increasingly important component of global investment. The World Investment Report 2026 reports that global FDI increased by 6% in 2025 to approximately US$1.6 trillion, with much of the increase associated with a limited number of large projects, particularly in AI-related digital infrastructure (UN Trade and Development, 2026). However, AI should not be considered an automatic determinant of FDI. Its effects depend on complementary factors including institutional quality, regulatory predictability, digital infrastructure, skilled labor, reliable energy, innovation capacity, and the ability of cities to connect foreign investors with local economic ecosystems. The paper argues that AI can become an important urban location advantage when it is integrated into a broader strategy of economic development and international competitiveness.