This article, starting from the characteristics facts of China’s Decentralization Reform and market reform lags behind, theoretically elaborates the local government’s intervention to the factor market resulting in the distorted factor prices. This distortion has been further strengthened in the investment competition and also caused regional uneven distribution of FDI in China. By using the provincial panel data during 2002~2011, it estimates the overall factor price distortions, and further tests the hypothesis. The results shows that FDI tends to flow to the regions with negative factor price distortions. Therefore, in the future China should straighten out the elements of the market price, and further clarify the boundaries of the market and the government, to play a regulatory role of the market mechanism in the elements field, so that the market economy could play a fundamental role in resource allocation.