Based on China’s panel data of 274 cities from 2005 to 2015, it empirically examined the impact of trade openness on urban’s innovation capability and the important role of industrial transformation and upgrading. It finds that, on the whole, expanding the level of trade openness is conducive to improving the urban’s ability to innovate. In the sample period, for each standard deviation of trade openness, the urban’s innovation capacity increases by about 0.054 1 standard deviations. The mechanism analysis shows that transformation and upgrading of industrial structure is an important channel for trade opening and upgrading of urban innovation ability. The specific performance is that trade opening can enhance the urban’s innovation ability through the three dimensions of quantity, quality and rationalization of industrial structure. According to the analysis of economic heterogeneity, trade openness in high-economic development areas effectively promotes the improvement of China’s urban innovation capacity through the upgrading of three dimensions of industrial structure, and the above mechanisms don’t establish in low-economic development areas. Finally, considering the hysteresis effect of model endogenous and economic variables, further analysis using empirical strategies such as lagging explanatory variables, adding control variables and deleting special sampless shows that the above conclusions are highly robust. The research conclusions are helpful to deepen the understanding of the relationship between trade opening and regional innovation capability and to further understand the important role of transformation and upgrading of industrial structure.