<p>Extensive scholarly focus has been dedicated to examining the effects of supplier–customer dynamics on corporate strategic actions. The connection between customer concentration and firm innovation has also been subject to research, yet the findings regarding this relationship have been inconclusive. Using a dataset of Chinese listed firms in the pharmaceutical industry from 2012 to 2020, this study examines how customer concentration affects Chinese pharmaceutical firms’ decisions in innovation investment. The ordinary least squares regression and fixed-effects model show that customer concentration positively and significantly impacts firm innovation, where a 1% increase in customer concentration correlates with a 0.2% increase in research and development investment. To address the endogeneity issue, the two-stage least squares regression and reverse causality analysis using lagged and lead variables confirm that customer concentration positively impacts firm innovation. Additionally, the research appraises the COVID-19 impact and discovers that the positive effect is more subdued during the COVID-19 pandemic. It is also found that the positive effect of customer concentration on firm innovation weakens when the Chinese government implements policies encouraging innovation, presumably because governmental intervention mitigates the incentive of customer–supplier interactions. Our research unveils the benefits of intimate customer–supplier relationships and provides novel insights into how supply chain relationships shape corporate innovation decisions. It also sheds some light on how Chinese pharmaceutical firms should adjust their strategies to balance customer concentration and innovation activities, considering the distinct nature of the pharmaceutical sector.</p>