When faced with the integration of international markets, why do some small industries in the developing world respond by taking the “low road” of cutting labor standards and wages while others take the “high road” of upgrading production to become globally competitive? Why are some able to adopt innovative ideas when many others fail to? This research compares efforts at innovation in three geographically clustered industries in Michoacán, Mexico: ceramics, avocado cultivation, and furniture. The former two sectors were able to innovate successfully by, respectively, generating and diffusing a lead-free glaze for ceramic goods and coordinating new plant cleanliness practices to overcome US import restrictions. However, small furniture producers failed to adopt new production practices that would have increased product quality and improved working conditions. Existing explanations – macroeconomic policy, human capital development, geography, culture – seem unable to account for this variation in outcomes across these sectors. This study proposes that the factor that sends producers down either the “low road” or the “high road” is the capacity to innovate or adopt existing productive ideas, and it tests the proposition that the public-private “coproduction” of innovation is a necessary strategy for innovation in small firms. Moreover, it explores the social and political underpinnings of the dynamics of coproduction in a single Mexican state, and, in so doing, seeks to expand the understanding of the broader conditions under which productive knowledge is disseminated across communities and organizations.