We examine whether organized crime affects firms’ performance (defined using Total Factor Productivity growth) both directly and indirectly, by downsizing the positive externalities arising from the geographic concentration of (intra‐ and inter‐industry) market‐related firms. The analysis uses a large sample of Italian small‐ and medium‐sized manufacturing firms over the period 2010–2013. The results highlight the negative direct effects of organized crime on firms’ productivity growth. Any positive effect derived from industrial clustering is thoroughly debilitated by a strong presence of organized crime, and the negative moderation effect of organized crime on productivity growth is greater for smaller than for larger firms.