<p>Digital finance, as an innovative form of financing, has a distinct impact on FDI inflows compared to traditional finance. This paper provides a theoretical analysis of the impact of digital finance on FDI inflows from both supply-side and demand-side perspectives. Based on data from prefecture-level cities in China, this study reveals the significant role of digital finance in facilitating FDI inflows. The advancement of digital finance not only enhances financial market efficiency and attracts FDI through its financial effects but also stimulates regional innovation, entrepreneurship, and consumer spending, resulting in increased FDI inflows due to its economic effects. The comparative analysis suggests that traditional financial development impedes FDI inflows and fails to attract FDI through financial and economic effects. The different roles of these two forms of finance may be attributed to their distinct contributions in promoting financial development and the varying stages they are currently in.</p>