This study focuses on innovation in a cluster of informal shoemaking firms in Ethiopia-namely the Mercato footwear cluster. It examines how differently those firms are embedded in networks and how heterogeneous they are in absorptive capacity, and how this heterogeneity affects their innovation performance. Business networks are the major channels through which knowledge flows into the cluster. The study reveals that despite geographical proximity and homogeneity in social background the firms in the cluster behave and perform differently. Based on econometric analysis we document a positive and strong effect of local network position and absorptive capacity on innovation performance. (c) 2012 Elsevier Ltd. All rights reserved.