This paper investigates the role of regional determinants on innovation performance controlling by the firm’s absorptive capacity and other sources of firm heterogeneity. The findings for a sample of firms in Spain support the hypothesis that regional determinants matter, though their role is subtler than the one frequently assumed. Rather than a direct influence on firm’s innovation, the regional context moderates the effect of internal determinants. In the case of product innovation the most important mechanism of interaction seems to be operating through cooperation in innovation, whereas for process innovation it seems to be through highly skilled labour