Abstract:Based on the panel data of 30 provinces, districts and cities in China from 2001 to 2015, this paper empirically examines the impact of labor market distortions and capital market distortions on the innovation efficiency by using fixed effect model and stochastic effect model. The findings are as follows. Market distortions in labor force and market distortions in capital factor have significant inhibitory effects on static innovation efficiency and innovation efficiency growth. Intra regional technology flows and foreign direct investment have a positive impact on regional innovation efficiency, and there is a significant substitution effect between the two. In addition, government support for innovation activities also significantly promotes the improvement of innovation efficiency. There are regional differences in the inhibitory effect of market distortions on innovation efficiency by different factor market distortions. Labor market distortions have a more pronounced inhibitory effect on innovation efficiency in the western region, while distortions in the capital market have a more pronounced inhibitory effect on innovation efficiency in the eastern provinces. In the western region where capital is scarce, the government’s scientific research input plays an indispensable role in carrying out innovation activities.