The aim of the paper is to investigate the process of spatial agglomeration of innovation and production activities and to assess the extent to which the degree of specialisation or diversity externalities in the area may affect the innovative output in a particular local industry. The analysis is carried out thanks to an original databank on innovation and production activity across 85 industrial sectors and 784 Italian Local Labour Systems, which are groupings of municipalities characterised by a high degree of self-contained flows of commuting workers. According to the global and local indicators of spatial association there are clear signs of spatial correlation in the distribution of innovation activities. The econometric analysis shows that the two types of externalities – specialisation and urbanisation economies – are both effective. Moreover, we find evidence for knowledge spillovers since technological activities of a local industry influence positively innovations of the same sectors in contiguous areas.