The paper investigates the role of dynamic externalities, university-industry linkages and role of social networking in the biotechnology industry in the European Union (EU). Universities act as platforms for local knowledge spillovers and university-industry cluster development in the biotechnology field. The R&D activities at universities contribute to successful business innovations. However, the relationship between the universities and the local innovation capabilities is much more complex and therefore requires more in-depth analysis. The following study derives from the knowledge of the new economic geography, endogenous growth theory, biotechnology, as well as theories of social capital and social networks. The quantitative research elaborates contemporary literature and databases to find channels of interdependence between local university-based knowledge flows, social capital, and biotechnology cluster performance. The results of the study show that the biotechnology industry relies very much on university-business R&D partnerships and research mobility (e.g. pharmaceutical firms that performed basic research in close cooperation with academia produced more patents). In addition, social networking and informal contacts seem to be a more important for the diffusion of knowledge, especially at the beginning of R&D process, as they allow for building credibility between potential partners.