Firms innovation serves as the microfoundation driving industrial transformation, thereby fostering high-quality economic development. Drawing on institutional theory and firm innovation management literatures, a framework was developed to investigate how institutional trust impacts firms' radical innovation, incremental innovation, as well as new product performance. Data from 165 pharmaceutical firms reveal that institutional trust more significantly boosts radical innovation than incremental innovation. The findings also indicate that radical innovation positively affects new product performance. However, incremental innovation shows a U-shaped relationship with new product performance. Institutional trust significantly moderates the link between incremental innovation and new product performance, but not between radical innovation and new product performance. By unpacking the important role of institutional trust in firms' innovation strategy the current study contributes to the understanding of the mechanisms of how external formal institutions influence firm innovation from a cognitive perspective. The research findings provide important insights for firms formulating innovation strategies, and also guide governments in refining formal institutional arrangements related to pharmaceutical innovation, thereby enhancing enthusiasm of firms for innovation.