Abstract: Deepening the market-oriented allocation of factors and promoting the orderly flow of factors are the key contents of China’s economic system reform. Based on panel data for 28 provinces from 2008 to 2020, this paper establishes a Tobit model to analyze the impact of the market-oriented allocation of factors on regional innovation efficiency. The study finds that the improvement in market-oriented allocation of factors can effectively promote innovation efficiency, but currently, market-oriented allocation of factors is insufficient. By constructing the biased technological progress index to explore its mechanism, the paper finds that market-oriented allocation of factors has no significant impact on labor-biased technological progress, but it can stimulate capital-biased technological progress to continue to shift towards capital, thereby improving regional innovation efficiency. The heterogeneous transmission path suggests that different institutional designs should be used to guide the process of factor marketization. From the realistic point of view, it is necessary to accelerate the systematic reform of market-oriented allocation of factors, make domestic economic circulation go smoothly, and give full play to the advantages of resource endowments to improve total factor productivity and innovative development capabilities.