The direct impact of institutional investment and government subsidies on micro-enterprise innovation has always been concerned by academia, but few scholars have explored their overall effect on the innovation level of the entire industry. Based on the dilemma of "big but not strong" and extensive development of China's manufacturing industry, this paper matches the national patent database with the database of China's industrial enterprises, and examines the impact of institutional investment and government subsidies on China's manufacturing industry innovation from a mesoscopic perspective. First of all, through the fixed-effect model test, this paper finds that institutional investment can significantly promote the number of manufacturing innovation, but there are differences in the innovation paths of high-tech and low-technology manufacturing sectors, and the promotion effect of institutional investment on high-tech manufacturing sector is significantly lower than that of low-technology sectors; Instead of achieving the expected effect, government subsidies have inhibited manufacturing innovation. The test results based on the three-stage least squares method and the propensity score matching method are consistent with the benchmark test results. In order to further analyze the path through which institutional investment affects manufacturing innovation, this paper takes R&D costs and innovation efficiency as intermediary variables. Through the stepwise test, it is shown that institutional investment can lead to an increase in R&D costs and improve manufacturing innovation efficiency, while government subsidies have a negative impact on innovation efficiency. The industrial agglomeration environment is an important factor that affects the operation and management of enterprises. Finally, this paper studies the industrial diversity agglomeration as the external environment of enterprise operation, and considers its regulatory effect when institutional investment and government subsidies play a role. The study finds that the diversity agglomeration inhibits the positive effect of institutional investment and enhances the negative effect of government subsidies. This paper matches and summarizes many micro and meso databases, such as China Industrial Enterprise Database, National Patent Database, Zero2IPO Institutional Investment Database and China Urban Statistical Yearbook, and studies the impact of institutional investment and government subsidies on China's manufacturing industry innovation from the industrial level. The paper also considers the possible interaction effects between regional enterprises. The research conclusion of this paper provides guidance for the follow-up research and practice. Based on theoretical and empirical research, combined with the current economic situation in China, this paper puts forward four policy recommendations:We should create a good institutional investment environment, guide the cooperation between institutions and manufacturing enterprises, and promote innovation; Increase support for scientific undertakings, guide the implementation and application of research achievements in universities and research institutions, and promote substantive and high-level innovation; We should formulate more effective fiscal subsidy policies to reduce rent-seeking behavior; Give full consideration to regional resource endowment and market environment, transform diversified agglomeration into market development advantages, and foster coordinated innovation of industrial chain clusters.