Abstract:   Facing the "low-end locking" and "high-end squeeze" of developed countries, China′s reliance on embedding itself in the global value chain (GVC) to enhance its technological innovation capability is becoming unsustainable. It must rely on domestic market integration, and the mutual promotion of domestic and international cycles to enhance regional innovation capacity. The paper measures the degree of GVC embedding in 30 provincial-level regions in China based on the customs database from 2005 to 2016, and uses the two-way fixed effects model, interaction model, and spatial Durbin model to empirically examine the mechanism and spatial spillover effects of GVC embedding on regional innovation capability from the perspective of market integration.The conclusions showed that: First, the degree of GVC embedding has a significant inhibitory effect on regional innovation capacity, and this effect mainly comes from the "export-import effect" generated by the forward embedding of GVC and the "low-end locking effect" brought by the backward embedding. Second, the inhibitory effect of GVC embedding on regional innovation capacity is heterogeneous between coastal and inland regions, i.e., compared with inland regions, the inhibitory effect of GVC embedding on regional innovation capacity is more significant in coastal regions. Third, from a spatial perspective, GVC embedding has a negative spatial spillover effect on the innovation capacity of neighboring regions, mainly due to the vicious competition between regional local governments, which leads to market segmentation and exacerbates the "siphon effect" of GVC embedding. Fourth, promoting domestic market integration can help weaken the inhibitory effect of GVC embedding on regional innovation capacity, and turn crisis into a positive spillover effect on the overall innovation capability of adjacent regions. Among them, market integration in the commodity market shows the most significant effect in weakening the inhibitory effect of GVC on regional innovation capacity.The main contributions are: First, this paper incorporates GVC, market integration and innovation capacity into a unified research framework, examining for the first time the mechanism of GVC embedding on regional innovation capacity from the perspective of market integration, and expanding the innovation effect generated by China′s participation in GVC under the dual circulation background. Second, this paper empirically examines the spatial spillover effect of GVC embedding on regional innovation capacity using the spatial Durbin model, and categorizes provincial-level regions into coastal and inland regions to explore the regional heterogeneity of the impact effect, which enriches the study of the economic effect of GVC in terms of spatial correlation and regional differences. Third, this paper finds that market integration can effectively weaken the inhibitory effect of embedded GVC on regional innovation capacity. This not only aligns with the national strategic goal of accelerating the construction of a new development pattern but also provides empirical evidence for China to gather both international and domestic markets and resources and promote innovation-driven development. It also provides a new path for China to overcome the dual dilemma of "lowend locking" and "high-end squeeze" from developed countries.Based on this, we make recommendations in the following two areas: First, implement "internal reforms" and actively promote the construction of a unified domestic market. Second, focus on connecting domestic and foreign markets and accelerate the construction of a new dual circulation development pattern.

Key words: global value chain, innovation capability, spatial spillover effect, market integration, regional heterogeneity