Technology and innovation play an increasingly important role in the economic development of both developed and developing countries. We investigate how policy and market factors influence firms’ (or other potential inventors’) decisions on innovation or imitation by developing a model that emphasizes expected market size, appropriability and technological opportunity. We empirically test the model using provincial pesticide innovation data from a rapidly developing country, China. We find that the government encouraged local innovation by opening regions to more international trade, by increasing investments in public research and education, and by strengthening intellectual property right (IPR) enforcement to meet its WTO TRIPS obligations. Moreover, while IPR enforcement and increases in market size are important in encouraging innovation, empirical evidence is mixed as inventors respond to these factors differently. Policies to increase expected market size could increase copying rather than inducing R&D investments, and extended patent life may reinforce the original standing of infringers as well as inventors.