Sustainable development of industry, especially in developing countries, is an effective way to solve the conflict between industrial economic growth and the ecological environment. Industrial environmental efficiency is selected to measure the sustainable development of industry. We used the super-SBM method to evaluate the industrial environmental efficiency of 29 provinces during the period of 2007-2015. Our study analyzes the effect of FDI and market fragmentation on industrial environmental efficiency based on the system GMM approach. The result indicates that the impact of FDI on industrial environmental efficiency is significantly negative, which suggests that FDI significantly hinders industrial environmental efficiency. Market fragmentation significantly inhibits industrial environmental efficiency. We also further investigate the effect of the interaction between FDI and market fragmentation on industrial environmental efficiency. The result indicates that the negative effect of FDI on industrial environmental efficiency is stronger in provinces with more severe market fragmentation. Based on the findings, the government should promot