Knowledge is the driving force of innovative small firms in high-tech industries. Knowledge is however context dependent, and varies across regions. This research explores differences and similarities in external knowledge factors accounting for new product innovations between small firms in high and low agglomeration regions. A framework is built in which small firms develop new products in two distinct environments: agglomeration i.e. ‘high agglomeration’ and regions lacking agglomeration i.e. ‘low agglomeration’ region. The framework considers external influences on new product innovations to be separated out into knowledge spillovers, referred to as non-market externalities and pecuniary knowledge externalities i.e. market based externalities. Based on interviews and surveys of firms in the Cambridge and Essex in the UK, it was found that: sources of product innovations by small firms in high and low agglomeration differ, in that small firms in low agglomeration are more influenced by imitation; but similarities exist in that firms in both regions are more influenced by knowledge spillovers over pecuniary knowledge, and international knowledge over local/national sources.