The domestic market advantage of the host country is one of the important factors affecting the innovation spillovers from foreign direct investment (FDI). Based on the domestic market orientation of FDI, the impact and effect of FDI entry on the innovation of local firms were analyzed using the Chinese Industrial Firms Database. Our empirical analysis generates the following conclusions. Firstly, FDI entry significantly promotes the innovation of local firms, and the domestic market orientation of FDI has a strong positive moderating effect on this promotion. This conclusion still holds after considering the endogeneity problem and a series of robustness tests. Secondly, the mechanism analysis shows that the domestic market orientation of FDI strengthens the promotion of FDI entry into the local firm’s innovation through the production localization effect and market structure effect. Thirdly, the heterogeneity analysis shows that in capital and technology-intensive industries and local enterprises with a smaller technological gap with foreign firms, FDI has a greater role in promoting innovation. For firms with different factor intensities, foreign domestic market orientation can play a positive moderating role; however, for local firms with a smaller technology gap with foreign investors, the moderating effect of foreign domestic market orientation is stronger. Under the strategic background of building a new development pattern of "dual circulation"，the paper brings inspiration for giving full play to the advantages of the domestic market to attract foreign investment at a high level and attract global resource elements to build an innovative country.