Social media have managed to radically change the way in which people interact and thus has outpaced the adoption of several previous communication innovations, such as mobile phones, Internet and television. Facing the dramatic increase of social media use, businesses are beginning to explore how these tools can help them grow and improve profits, not just with common practices such as marketing, but as part of their business collaboration and open innovation practices. Nowadays, an increasing number of companies are trying to make sense of Web 2.0 applications and align their innovation strategy with the use of these tools. The goal of this research is to investigate how the use of social media, when combined with a number of organizational and environmental conditions, helps firms improve their innovation performance. To understand how social media is impacting firms' innovation, we employed the TOE theoretical framework and we applied the configuration theory, which is implemented through the novel method of fuzzy set qualitative comparative analysis (fsQCA) in a sample of 120 firms using social media tools from Greece and Cyprus. Our findings demonstrate firm size as the greatest discriminant and reveals four alternative configurations associating the use of certain Web 2.0 tools (diversified based on the media richness they provide) with firms’ open innovation practices (external knowledge breadth) under certain environmental influences (competition intensity and intellectual property protection).