This study applies a resource-based perspective to investigate how competition by informal firms affects innovation in formal firms in China. By analyzing survey data, collected from 1,686 Chinese manufacturing firms, we find that formal firms tend to increase their rate of innovation when faced with informal competition. However, formal firms’ access to increased global supply chain collaboration mitigates the challenges presented to their rate of innovation by the informal firms. We present implications for future research, practice, and policy-making.