The geographical conditions of innovation in Mexico’s regions and its relationship with knowledge capital and productivity are analyzed along 1994-2006. A spatial model is applied to capture the knowledge spillovers effects amongst geographically neighbors regions. Results show positive and significant effects from innovation and productivity of neighboring over labor productivity and knowledge capital. The opposite, meaning a negative effect of local innovation activities within the same region is also important. In addition, the geographical spillovers of productivity and innovation are found as the greatest influence, creating externalities which generate interactions among geographically close regions.