This paper first reviews the FDI theories with the focus on Dunning Eclectic Theory of International Production and then mainly introduces the theories about the investment environment (IE) and the IE eva luation theory in the international and the national economic area. This paper applies the FDI performance index and the FDI potential index; make a comparison analysis on the performance and potential of FDI in Dalian and Shanghai for the period of 1995 to 2004. For the FDI performance index Dalian and Shanghai are both with the value above one which indicates the excellent performance for both cities. However Dalian is more successful in attracting FDI than Shanghai. For the FDI potential index Dalian and Shanghai are both above the mid-point ranking which means they have good potential and competition ability of attracting FDI in the future. After comparing these two indexes Dalian and Shanghai both belong to the front-runner cities. At the end the conclusion and suggestion for improving the competition ability of inducing FDI are included.