This paper investigates the influence of channel conflict on innovation capability in long-term organizational relationships and studies the specific mechanism through which channel conflict affects knowledge sharing and knowledge utilization. Based on a questionnaire survey of 152 SMEs in China, the results show that: (1) functional conflict can stimulate inter-organizational knowledge sharing, while the frequency of conflict negatively moderates the relationship between functional conflict and inter-organizational knowledge sharing; (2) knowledge sharing has a mediating effect on the relationship between functional conflict and innovation capability; and (3) relationship quality positively moderates the relationship between functional conflict and knowledge sharing, but negatively moderates the relationship between knowledge sharing and innovation capability. These findings broaden the theoretical scope of conflict theory and refine the theoretical framework of channel conflict. This study also provides significant practical implications for organizations with respect to effectively guiding and resolving conflicts.