Abstract: This paper constructs a theoretical model that incorporates firms’ internal and external product networks and innovations with different technological levels to explore how product networks influence firms’ heterogeneous innovation patterns. The findings reveal that firms with product structures closer to external network centers (market-central products) achieve higher horizontal and vertical innovation outputs. Meanwhile, firms closer to internal network cores (core products) have lower horizontal innovation outputs, with unclear effects on vertical innovation. However, the impact on horizontal innovation only holds under low market competition intensity. Mechanism analysis shows that proximity to external network centers facilitates access to diverse knowledge, enhancing the positive role of quality differentiation in innovation. Conversely, proximity to internal network cores reduces information processing capacity and amplifies the negative impact of production costs on horizontal innovation. Nevertheless, internal network core proximity represents a form of internal governance, and its negative effect on horizontal innovation is mitigated by high market competition. This study reveals the relationship between firms’ product networks and innovation performance, and provides rich implications for the optimization of innovation policy design.

Key words: product network, vertical innovation, horizontal innovation, knowledge spillover, information flow