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This paper has as its aim to analyse multinational enterprises' location decisions from the perspective of the knowledge-based firm in an attempt to answer the following questions: Are innovative MNEs more likely to be located in areas with a higher degree of agglomeration? Who benefits to a greater extent − in terms of innovation − from geographical proximity with other agents: national or foreign enterprises? What role does absorptive capacity play in the relationship between agglomeration and innovation? According to this research work, agglomeration differently influences the innovation of MNE subsidiaries – through knowledge spillovers – depending on the types of agglomerated companies. The analysis performed with a sample of firms located in Spain includes local and foreign companies and uses data from a survey conducted by the National Statistics Institute (INE for its Spanish initials) in 2016. The results show that the agglomeration of similar enterprises favours innovation amongst foreign firms, as opposed to local ones, which absorb both positive and negative effects. [ABSTRACT FROM AUTHOR]