This paper establishes a theoretical model to demonstrate that optimizing the business environ- ment can reduce transaction costs, improve transaction efficiency, and facilitate the evolution of division of la- bor. The evolution of the division of labor is the process of innovation, and innovation is the source of economic development. Based on the data at the inter-provincial, urban, and transnational levels, and using instrumental variable regression to alleviate the endogeneity problem, the study found that the business environment has a sig- nificant positive impact on per capita GDP. Through the mediation effect analysis, it is found that innovation is a mechanism by which the business environment affects economic development. Therefore, a good business en- vironment is the foundation of a country or region’ s innovation and economic development, and an important as- pect to enhance the regional comprehensive competitiveness. Optimizing the business environment should focus not only on improving the hard environment, but also on optimizing the soft environment.