The paper investigates how innovation relates to outsourcing for firms located in a specific local production system. A set of theoretical correlations between innovation related variables and outsourcing decisions is formulated by drawing on a heterogeneous body of literature. Correlations are tested with respect to a representative sample of firms of a local production system in Emilia Romagna: Reggio Emilia. The main result of the paper is that, in the district-like context investigated, where networking intertwines with market mediated mechanisms, the firm's innovativeness correlates positively with the complexity of the outsourcing strategies. Once the firms' embeddedness is controlled for, the 'dualistic' argument that innovative firms do not outsource in order to avoid the impoverishment of their capabilities is not guaranteed. On the contrary, according to a 'developmental' argument, being innovative in Reggio Emilia requires a certain degree of tapping-into an external provider, in order to benefit from its own competences.