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Product development teams become increasingly dispersed because innovative project tasks require the input of specialized knowledge at multiple locations. Prior analyses indicate that as team member dispersion increases teams find it more difficult to perform high-quality teamwork. Moreover, the literature has largely assumed that the performance effect of teamwork in innovative projects would be driven by the nature of the project task and that this would be true regardless of the degree to which team members were co-located. The present study argues, however, that teamwork affects team performance more strongly as team member dispersion increases. Two main reasons for this are discussed: (1) High-quality teamwork can leverage the increased knowledge potential of dispersed teams; and (2) team leaders in more dispersed teams have little possibility to compensate low-quality teamwork through hands-on leadership. Responses from 575 managers, team leaders, and team members of 145 new product development (NPD) projects in the software industry were used to analyze the moderating effect of team member proximity on the relationship between teamwork quality and team performance. Using regression analysis, support is found for the initial hypothesis that team member dispersion moderates the relationship between teamwork quality and team performance, that is, that increasing team member dispersion increases the positive impact of teamwork quality on team performance. As such, the present analysis advances understanding of dispersed teams, showing that teamwork quality not only is more difficult to achieve but also is more critical to team performance as team dispersion increases. Furthermore, low-proximity teams can reach higher levels of effectiveness and efficiency than co-located ones if they manage to achieve high levels of teamwork over distance. Thus, team dispersion may well be an opportunity and should not just be regarded as a liability to be overcome or avoided. This research recognizes that the vast majority of teams are neither perfectly co-located nor perfectly virtual. There are many shades of gray between these two extremes, and various individual, team, task, and contextual characteristics may have an effect on how decreases-however small-in geographical proximity affect the process and performance of teams. Future research is encouraged to address such factors at different levels of analysis aimed at providing managers with recommendations for dispersed teamwork.Ã The authors thank the editor and the reviewers for their constructive comments on earlier drafts of this manuscript and acknowledge the financial support by Bocconi University's basic research fund.