The aim of this research is to analyze the key role that knowledge, Social Capabilities and innovations play in the transfer and diffusion of tacit knowledge in an industrial district and how this creates new knowledge and innovation. The study is also focused on a measure of Social Capabilities within a district using a composite indicator and we investigate the effective role of these inputs in stimulating innovative activity in an industrial district performance. The analysis, measuring Social Capabilities, requires data collection using a questionnaire designed to obtain information which permit the development of qualitative and quantitative indicators.In contrast with the neoclassical production function, where economic growth depends only on traditional resources such as capital, labour and technology, which is an exogenous datum, in the cognitive approach we must consider the residual variables of Social Capabilities and knowledge. These, in fact, represent the key variables to understand the recent structural changes and competitiveness of an industrial district. In this work, the peculiarity of knowledge rests on Social Capabilities or social abilities to increase the process of the accumulation of knowledge and of the network broadening. The former depends on the degree of cumulativeness, and appropriability, represented by the capacity of new knowledge to generate further new knowledge and innovation. The greater is the degree of appropriability of knowledge and in particular of tacit knowledge, the smaller becomes the capacity for its diffusion in a district and its growth. A higher level of knowledge and Social Capabilities corresponds to a higher degree of innovation. The diffusion of the network depends on the degree of cooperation and on the positive externalities of an industrial district.In the theoretical part, the discussion focuses on the concept of knowledge and of Social Capabilities, on the different typologies of knowledge, its creation and diffusion in firm networks utilizing Nonaka and Takeuchi's model, on the nature and definition of Social Capabilities in the industrial district and on the relationship among these and innovation.The empirical aspect is based upon original results of surveys carried out on a sample of entrepreneurs in Southern Italy specializing in a special industrial district composed of wedding dresses and baby dresses utilizing a multi-method approach. To highlight the relationship existing between innovation and Social Capabilities, we chose our sample within three categories, classical, innovative and traditional/fashion utilizing the academic classification. We measure Social Capabilities, we describe the Social Capabilities diffusion in the case study and finally we present our empirical analysis estimating an innovation equation.