This paper classifies innovation as quality-improving or cost-reducing and estimates a dynamic model incorporating firm export, quality innovation, and cost innovation decisions. Estimation results show that export, quality innovation, and cost innovation increase next-period firm productivity by 1.39%, 1.23%, and 1.27%, respectively. Additionally, quality innovation raises next-period export demand by 47%. Counterfactual analyses suggest that (1) foreign market growth has a larger impact on firm export and innovation decisions than domestic market growth, but neither market significantly affects firm productivity; (2) subsidizing continuing quality innovators generates the highest financial return, and subsidizing continuing cost innovators brings the most productivity gain
