This study develops a moderation model to examine the role of a proactive environmental strategy on eco‐innovation. Drawing upon the perspectives of contingency theory, this study argues that the impacts of sustainability strategy on eco‐innovation depend on market demand, innovation intensity and government subsidy. The sample used to test the hypotheses is obtained from the Community Innovation Survey in Taiwan. A total of 2955 manufacturing firms are included in the final sample. A logit moderating regression is adopted to analyze the models. The results reveal that market demand and government subsidy positively moderate the relationship between environmental strategy and eco‐innovation. Specifically, firms are more likely to adopt a proactive environmental strategy to improve eco‐innovation under high levels of market demand and government subsidy. Furthermore, the results indicate that innovation intensity affects the effect of environmental strategy on eco‐innovation, but the direction of the influence varies with different categories of eco‐innovation. Copyright © 2016 John Wiley & Sons, Ltd and ERP Environment