Abstract: This paper applies the method of stochastic frontier analysis to carry out a comprehensive measurement of the factor price distortion at China’s 267 cities except Tibet from 1998 to 2011. On such a basis, it constructs a conditional logistic model to examine the impact of factor price distortion on the location choice of the enterprises with different production efficiency from the micro-level. The result shows that during 1998-2011, the general factor prices in China are severely and negatively distorted and are presenting an increasing trend year by year. In the aspect of spatial distribution, the negatively distorted factor prices have formed a pattern of stronger in the Midwestern region and weaker in the eastern coastal region and the northeastern region in China. The more efficient the business production, the lower the probability to choose the cities with higher level of factor price distortion. Therefore, to raise the degree of factor price distortion by the local governments is not helpful to attract enterprises with efficient production to locate.

Key words: factor price distortion; business location choice; heterogeneity