Abstract：Building on the theory of transaction cost and relational exchange, this study uses survey data from 320 Chinese manufacturing firms to investigate the mechanism of strategic alliance governance on value co-creation and firms’ breakthrough innovation, and to analyze the moderating effect of knowledge coupling on the above relationship. The results demonstrate that contractual governance and relational governance of strategic alliance are positively correlated with firms’ breakthrough innovation, and the effect of relational governance is better than contractual governance. We also find that the three dimensions of value co-creation (e.g., joint planning, joint problem solving, and cooperative flexibility) partly mediate the relationship between strategic alliance governance mechanisms and firms’ breakthrough innovation, the degree of mediating effect is ranked in descending order of joint problem solving, cooperative flexibility, and joint planning. In addition, the knowledge coupling of alliance members not only strengthens the positive relationship between value co-creation and firms’ breakthrough innovation, but also enhances the mediating role of value co-creation.
