The “Fourteenth Five-year Plan” of China puts forward the idea of “Deeply fighting the battle of pollution prevention and control” and emphasizes that “Improving the technological innovation ability of enterprises is the key to development”. For the government, how to find a balance between environmental protection and enterprise innovation to realize the green development is an important issue during the period of “Fourteenth Five-year Plan”. Based on the samples of the listed industrial enterprises in Taihu Lake Basin from 2013 to 2018, the relationship between environmental regulation and enterprise innovation is investigated. The research results are as follows: (1)Under the joint effects of compliance cost and innovation compensation, the relationship between local environmental regulation and enterprise innovation is U-shaped. (2)For the enterprises with high financing constraints, they may not be able to bear the high risk of innovation, thus the inflection point of positive incentive of environmental regulation on enterprise innovation is higher than that of financing constraint. (3)For the enterprises with high transfer costs, they cannot easily transfer to places with low emission limits, so their inflection point of U-shaped relationship between environmental regulation and enterprise innovation comes earlier than that for the enterprises with low transfer costs.