With the development of economy, society and the improvement of living standard, traditional Chinese medicine (TCM) has attracted more and more attentions in the world and is playing an important role in healthcare. The innovation output of TCM industry shows huge regional differences and obvious spatial agglomerations. This study aims at finding out the characteristics of the innovation system, the influence factors, spatial agglomerations, spatial dependences, and spatial heterogeneity of TCM industry; and what should government do to promote the innovation in different regions. By combination of knowledge production function (KPF), technological regime theory, regional innovation system theory, theory of knowledge spillover, and the characteristics of TCM industry, the theoretical assumptions are proposed, the KPF model of TCM industry innovation is built, the multiple linear regressions and spatial econometric methods including spatial autocorrelation test, spatial constant coefficient models, and geographical weighted regressions are used to explore the influence of technological opportunity, appropriability of innovation, knowledge base, technological cumulativeness, regional environment, and innovation activities in the adjacent regions on the local innovation output of TCM industry. 31 regions in China are taken as research objects, application number of service patents is used as measurement index of innovation output, and the results of three stages are compared. The results show that the technological innovation of TCM industry is a complex process of multi-sectoral collaboration; the innovation of TCM industry in 31 regions in China shows the continuous spatial agglomeration feature, and the patent innovation activities of TCM industry have serious path dependence; the main factors that can affect the regional innovation output of TCM industry continuously and positively are human resources, research and development investment, output of new product, participation of cooperative innovation, and absorption of technology transfer; accordingly, there are four effective innovation modes: investment-push, market-pull, cooperative innovation, and technology transfer innovation; besides local factors, innovation output of TCM industry in a region is also affected by the innovative activities in adjacent regions; the impacts of each factor on innovation of different regions exhibit a remarkable characteristic of heterogeneity.