This study investigates the role of financial development in shaping the relationship between FDI and firm innovation, based on Chinese firm-level dataset during 2008-2014. Our findings reveal that bank deregulation significantly enhances the positive effect of FDI on firm innovation. We also find that firms with greater financial constraints and those located in cities with lower levels of bank competition exhibit a more pronounced response. These results underscore the importance of considering financial market conditions and highlight the role of financial constraints and bank competition as crucial channels through which bank deregulation influences the effect of FDI on firm innovation.