This paper aims to introduce some specific insights regarding social networks and the geographical proximity of firms in order to investigate factors involved in the innovation of firms. In particular, this study reviews ideas from the industrial district literature by analyzing the role played by the dimensions of social capital, that is, social interactions, trust, shared vision and involvement of local institutions, in the process and product innovation of firms inside the district. This paper draws on an analysis comparing district members and nonmembers based on a sample of 220 manufacturing firms in the Valencia Region (Spain). Findings suggest a positive association between district affiliation, social capital and involvement of local institutions and innovation that can offer relevant prescriptions for policy makers and individual entrepreneurs.