By selecting the panel data of China’s manufacturing industry from 2005 to 2020, the two-way fixed effect model was used to examine the impact of digital transformation on innovation, and the intermediary effect model was used to examine its impact mechanism based on market, technology and product dimensions. The research results show that digital transformation has a significant innovation effect, and shows the dual heterogeneity of industry and investment. On the one hand, digital transformation inhibits innovation in labor resource intensive industries, but has a positive impact on innovation in capital technology intensive industries. On the other hand, hardware digital transformation has a stronger innovation effect than software digital transformation. Market scale effect, technology transformation effect and product innovation effect are the three major channels for digital transformation to promote manufacturing innovation. Among them, hardware digital transformation can lead to technology transformation and upgrading and product innovation and development to promote innovation, while software digital transformation can drive innovation through local market scale expansion and product innovation and development.