Abstract: In this paper, we first develop an integrated theoretical model including markup, production cost, market scale, competitive parameter and innovation investment by introducing the innovation function into the general equilibrium model, and carries out the theoretical proposition of export demand change and innovation activity impact markup. Then we empirically test these theoretical propositions based on the matching data of China industrial enterprises database-China customs database-United Nations commodity trade database. The results indicate that the increase of competition caused by the shift of export demand has a negative impact on the enterprise markup, while the high production efficiency and innovation activities of enterprises can largely weaken the negative impact. But the innovation activities of enterprises with low initial productivity cannot effectively weaken the negative impact brought by competition, and it is uncertain for whether enterprises with high initial productivity can completely weaken the negative effect of competition through innovation activities. Further comparative analysis from the perspective of factor density, region, and mode of trade show that, for the firms with technology-intensive and capital-intensive, locating in the eastern region, and conducting general trade, their markups are less affected by the negative impact of demand changes and more affected by the positive impact of innovation activities.

Key words: demand shift, innovation, international market power, firm's markup