The recent years have witnessed an increasing number of manufacturers in developed markets pursuing service-led innovation to secure their sustainable growth and competitive positions. This study compares the manufacturing firm performance outcomes of two types of innovation activities in the value chain (i.e., service innovation and product innovativeness) contingent on institutional environment but in an aspirant market – China. To do so we conducted two studies: A secondary data study (Study 1) used a longitudinal panel dataset of 1,167 manufacturing firms and a robustness study (Study 2) used primary survey data from 171 manufacturing firms. Both studies offer consistent empirical results that in the dysfunctional competition environment, and in contrast to product innovativeness, service innovation is less effective for manufacturing performance but works more effectively for performance in the complicated institutional environment when government support and dysfunctional competition co-exist. The research contributes to the fields of aspirant markets and innovation by developing our understanding of the firm’s strategic responses pertaining to innovation in the context of a complicated institutional environment, the latter informed by structuration theory. The paper offers a fine-grained view to manufacturing innovation and provides the practical implications for managers and clear guidance to firms and governments in the aspirant markets in regards to innovation practice, strategy, and policy.