Drawing on institutional theory and firm innovation management literatures, we propose a framework to investigate how institutional trust impacts firms’ radical innovation, incremental innovation, and new product performance. Empirical results from 165 pharmaceutical firms show that, institutional trust enhances radical innovation to a greater extent than incremental innovation. This study further finds that radical innovation positively impacts new product performance, while incremental innovation ^{has a U-relationship with new pr}oduct performance, and institutional trust significantly moderates the relationship between incremental innovation and new product performance but not the relationship 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.