Most economics and urban literature focuses on the economic aspects of foreign investors' impact on cities and defends their positive role in urban development. This paper takes a different approach by developing an urban economics model for tourist cities that illustrates how, when there is local underinvestment and a large influx of foreign labour, transnational enterprises may make their profits at the expense of local businesses. Therefore, it is the government's responsibility to regulate foreign investment in a way that is conducive to sustainable development. Macao is adopted as a case study. Copyright c 2010 John Wiley & Sons, Ltd.