Abstract: On the basis of distinguishing whether firms participate in innovation and innovation performance, based on the micro-matching data of Chinese industrial firms and authorized patents from 1998 to 2013, the Heckman two-stage model is used to estimate the impact of two competitive factors, firm size and market structure, on firm innovation decision and innovation output. Study found:firm size and market structure of China's industrial firms were significantly positive influence on decision making and innovation output, and the effect is more obvious in foreign-funded firms, state-owned firms, export firms and coastal, which means the two Schumpeter hypotheses that large firms and a certain degree of monopoly may be more conducive to innovation are both valid in Chinese industrial firms. The results indicated that the scale expansion of firms and the moderate concentration of industrial market structure generated by normal market competition can not only make more Chinese firms participate in innovation competition to improve the probability of R&D success, but also break through the technological blockade and improve the core competitiveness of firms by improving the innovation output of firms.

Key words: market structure, firm size, firm innovation, schumpeter hypothesis