This paper establishes a comprehensise indicator system of regional innovation capability and empirically estimates the effects of undertaking international service outsourcing on improvement of innovation capability based on the time series data of Zhejiang Province during 2008-2017. The results show that, undertaking international service outsourcing improves the innovation capability of Zhejiang significantly, but not the converse. Outsourcing training and learning are the main pathways of technology diffusion during undertaking service outsourcing. The policy effects of establishing service outsourcing base cities are remarkable, which promote exceedingly the development of both service outsourcing and regional innovation. However, the present low outsourcing industry structure will restrain the regional innovation. The policy implications of this paper not only have practical significance on optimizing international competitiveness of service industry in Zhejiang, but also conductive for Chinese Service climbing the Global Value Chain.