Innovation-driven development is a major strategic deployment of the country. Low-and Medium-technology (LMT) manufacturing industry is the main body of China’s manufacturing industry. What role does innovation play in the LMT manufacturing industry? In this paper, we put forward three hypotheses based on the relations of industrial agglomeration, innovation, and the local economic growth. We then built a mediation model and used two subsector data from the wood processing industry to test the hypotheses. The results showed that the influence of innovation on local economic growth was affected by their positions in the value chain. Only the innovation activities of the end-product subsector could significantly improve the local economy. Moreover, the improvement of the innovation activities in the intermediate-product subsector were limited.