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Abstract This study investigated how urban cultural and economic tolerance affects urban innovative capacities based on China's prefecture‐level cities. Several tolerance indices, including ratios of migrants, rental housing, gay people, and private economies were introduced and the cities’ tolerance scores were measured using factor analysis. The results show that cities with higher cultural and economical tolerant scores were agglomerated in three metropolitan areas in China's southeastern coastal region. The spatial regression model demonstrates that urban cultural and economic tolerance increases urban innovation output and promotes innovation capacities. We also introduced the crime rate as an instrumental variable and found that the effect of tolerance on innovation remains robust. Our study suggests it is important for the Chinese government to establish an open and tolerant environment to attract migrants, creative artists, and entrepreneurs to foster urban vitality and improve urban innovative capacities.