Abstract: Based on the method of reflection, this paper measures the capacity of China's manufacturing exporting firms, which shows an in-homogeneous distribution. This paper use the micro-data of industrial firm database and customs database from 2000 to 2006 to explore how R&D affects total factor productivity for firms with different capacity. The results show that both R&D and capacity facilitate the improvement of total factor productivity; China’s firms generally show the characteristics of product innovation; non-state-owned firms and tax incentive firms show the characteristics of product innovation, state-owned firms and subsidized firms show the characteristics of process innovation; China's medium and high technology industry have not demonstrated the characteristics of product innovation models. China should implement inclusive tax incentives rather than selective industrial policies to make market competition work and encourage firms to improve their product innovation models and productivity levels.