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Abstract:This paper focuses on the notion of “industrial clusters” as a descriptor to discuss innovation in less-developed or industrializing economies. A critical review of the literature on industrial clusters is used to identify the key determinants of clusters. A frame of analysis is presented to examine the institutional factors that underpin cluster performance. The analysis of two case studies shows that whether or not a cluster becomes an integrated part of an economic system and contributes to economic growth depends on the type of cluster (sectoral location), geography (physical location), the institutional landscape that structures how the actors organize themselves (the mode of governance), the external (macroeconomic) environment, and whether or not the combination of all these factors is conducive to learning.