This paper presents a simple model of the innovations that result from face-to-face communication and mutual learning in upstream-downstream relations. To examine the framework, we empirically investigate the impact of mutual knowledge exchanges on product and process innovation using a survey of manufacturing firms in Indonesia, the Philippines, Thailand and Vietnam. Evidence from interconnected firms in developing economies suggests that firms with mutual exchanges between engineers and customers achieved product innovations with new technologies and new markets. However, this is not true for simple improvement of products or process innovation. Mutual exchanges with engineers can be expected to play an important role in the case of costly innovation and in situations unknown situation to the firms.