This article examines the link between foreign institutional holdings and firms’ efficiency in labor investment in the setting of Chinese markets. We find that foreign institutional investors enhance firms’ labor investment outcomes primarily through mitigating asymmetric information and by strengthening internal governance. Specifically, the influence of foreign institutional investors on a firm’s labor investment efficiency is stronger when the firm faces greater labor adjustment frictions. This effect is more evident when foreign institutional investors are originated from countries or areas with stronger cultural connections to China, stronger governance quality, common law traditions, or stronger bargaining power in the firms’ governance. Our paper contributes to the literature in that it documents the monitoring role of foreign institutional investors from the perspective of firms’ labor investment decisions, and adds to the literature on the drivers of firms’ labor investment choices.