The contribution investigates social institutions in the context of the development of innovative activities in the penal institutions of Russia and their impact on the socio-economic growth of the country’s regions. The purpose of this study is to analyze the cyclical process of organizing entrepreneurial activity within the institutions under consideration and to identify the necessary external impulses for the successful functioning of the entrepreneurial process. The authors conclude about the significance of such external factors as public participation and support and clarify the role of investment institutions and resource suppliers in creating favorable conditions for enterprises of the penal system to conduct regional business. Two types of entrepreneurial activity are considered: labor-intensive production of budget goods and production of unique products. Their advantages and areas of organization are determined taking into account the specifics of labor activity in the institutions of the penal system. For the innovative development of territories, the importance of cooperation with public institutions, educational institutions and private enterprises is emphasized to form adaptive business models in the penal institutions, support the public demand and ensure the integration of innovative solutions. The proposed classification of participation institutions emphasizes their significant influence on the innovative development of territories, contributing to the creation of sustainable models of entrepreneurship in the penitentiary institutions and the regional socio-economic growth.