This study aims to understand how firms innovate by absorbing knowledge from local innovation systems and global value chains. In a study of the home accessories industry in Yogyakarta, Indonesia, absorptive capacity emerges as the only variable that significantly explains variation in innovation. Contrary to expectation, innovation does not depend on the type or depth of interactions in the local innovation system, nor on interactions or governance of global value chains, but merely on the ability of a firm to absorb and use the almost endless amount of knowledge available