Low-medium technology (LMT) industry, as a key role of China′s manufacturing, has different technological paradigm and development path from high technology industry. The innovation activities of LMT industry mainly focus on non-research and development (R&D), such as improving manufacturing technique and product quality, optimizing production process and supplying new products. However, most researches have employed the indicators that reflected the innovation level of high technology industry (e.g., R&D intensity) to measure the innovation activities of LMT industry. Thus, the innovation activities of LMT industries may be underestimated or even ignored.

Based on the data of wood-processing enterprises (i.e., plywood, chipboard, fiberboard and wood floor enterprises), this study introduces innovation as an intermediary variable to accurately explore the impact of LMT enterprises′ innovation activities on business performance. The wood-processing industry has been in the mature stage of industry life cycle and has more dependence on non-R&D activities: improving the stability of the on-sale products, launching new products, etc. When the innovation activities are converted into new products, the maximum economic benefits can be obtained. Therefore, we use the proportion of delivery value of new products in the total delivery value to measure the innovation level of wood-processing enterprises. In this way, the bias estimation caused by the improper indicator of innovation can be avoid. The independent and dependent variables of this study are agglomeration externalities and enterprise profitability, respectively, because China′s wood-processing enterprises are almost agglomerated in geographic distribution and agglomeration externalities exert a positive effect on enterprise profitability. The agglomeration externalities include MAR externalities, Porter externalities and Jacobs externalities, while the enterprise profitability is reflected by the proportion of net profit in the total assets of wood-processing enterprises.

〖JP3〗In this study, we make two hypotheses: one is that the agglomeration of the wood-processing enterprises has externalities and stimulates their innovative activities (H1). The other is that the innovation activities of wood-processing enterprises help to improve the profitability (H2). The regression analysis is conducted for 15 times (including 3 full sample regressions and 12 industry-level regression) to test the hypotheses. The results show that there are linear relationship between agglomeration externalities and innovation in the 13 regression analysis, which illustrated the correctness of the hypothesis one. While the hypothesis two is not supported by our study with 5 regression results revealing a mediating effect (including 2 perfect mediating effect and 3 partial mediating effect).
The differences of the empirical results mainly from the functional heterogeneity of intermediate products and final products. Specifically, the manufacturers of wood floor survive in the monopolistic competition market, because wood floor, as a final product, can be directly accessed by consumers. The manufacturers of wood floor need to pay closely attention to consumer preferences so that they can make corresponding adjustments in the product properties and parameter. With the differentiation strategy, the monopoly power is capable to be consolidated. While the manufacturers of wood-based panel compete in the perfect competition market, because wood-based panel is the category of the intermediate products. The manufacturers produce as the standardized specifications, thus there is no significant differences in wood-based panel. In final, the manufacturing enterprise more relies on cost advantage to compete, resulting in the less enthusiasm for innovation. 

In summary, the influence of innovation on enterprise profitability is affected by the positions in the value chain. Only the innovation activities of final product manufacturers can significantly enhance enterprise profitability, while for intermediate product manufacturers, innovation exerts little impacts on its profitability.