Against the backdrop of a sluggish global economic recovery and intensifying international trade frictions, high-quality overseas direct investment (ODI) has become an important path for Chinese firms to restructure industrial and supply chains and serve the new “dual circulation” development strategy. However, as geopolitical competition intensifies, developed countries have imposed stricter access restrictions and security screening on Chinese investment in key sectors. Coupled with institutional differences limiting corporate resource integration, the resource allocation of Chinese firms’ ODI falls short of Pareto optimality. As an important instrument for promoting institutional cooperation, the signing of Free Trade Agreements (FTAs) and the deepening of FTA provisions have become crucial policy tools for governments to guide firms in their global expansion.

This paper integrates data from the Zephyr global M&A database, the FDI Markets greenfield investment database, and the CSMAR listed company financial database to construct an unbalanced panel dataset covering 117 host countries and 630 Chinese firms from 2007 to 2022. It measures FTA deepening by provision heterogeneity and employs the Richardson extended model to estimate Chinese firms’ ODI efficiency, systematically examining the impact of FTA deepening on Chinese firms’ ODI efficiency. The findings reveal that both horizontal and vertical FTA deepening significantly enhance Chinese firms’ ODI efficiency. The optimization of host-country investment environments and the alleviation of corporate financing constraints serve as the main mechanisms. Furthermore, the types of vertical provisions, host-country institutional quality, and bilateral political relations exert heterogeneous effects on the effectiveness of FTA deepening.

The main innovations of this paper are twofold: First, it breaks away from the assumption of FTA provision homogeneity by meticulously measuring FTA deepening from two dimensions—horizontal (increase in effective WTO+ and WTO-X provisions) and vertical (increase in ODI-related provisions)—based on the deep provision catalog released by the World Bank. Second, from the perspective of institutional innovation in regional economic cooperation, it effectively identifies the direction and mechanisms of FTA deepening’s impact on ODI efficiency, providing valuable policy insights for clarifying the directions and priorities of FTA deepening and enhancing Chinese firms’ ODI efficiency.