The paper explores determinants of innovation capability in small UK electronics and software firms. An experimental innovation index is used alongside conventional proxies of innovative performance. These indicators are correlated with variables capturing a range of potentially important internal sources—such as education, prior work experience and R&D effort—as well as measures of intensity of external interactions and proximity in network relations. The findings support the importance of R&D, the key role played by the regional science base in nurturing high-tech spin-offs, and proximity to suppliers. However, no support is found for the current policy fashion of encouraging regional networks revolving around firms in similar business activities and close customer relations.