According to the panel data of the year from 1998 to 2005 regarding innovational activities in China's various provinces, autonomous regions and municipalities directly under the Central government, this paper empirically investigates the impact of regional innovation environment on patent-measured efficiency of innovation output and explains the system cause for this disparity. The results show that innovation performance differs significantly among the 30 provinces (municipalities), not only because of the difference in the input level and capability of R&D, but also the regional innovation environment such as FDI, degree of marketization, stock of accumulated knowledge and ability of knowledge flows. We finally raise policy suggestions on how to enhance regional innovation capability and provide solutions to the “bottleneck” problems.