Silicon Valley in California and Route 128 in Massachusetts are America's centres of electronics innovation and entrepreneurship. The regions are similar in many respects: both trace their origins to unversity research and military spending, and both faced severe downturns in the early 1980s. Today, however, Silicon Valley is flourishing again while Route 128 continues to decline. Why did Silicon Valley adapt successfully to intensifying international competition, while Route 128 ceded its longstanding advantage in computer design and manufacturing to the west? The author argues that despite similar histories and technologies, Silicon Valley developed the type of decentralized industrial system that encourages experimentation, collaboration and collective learning among networks of specialist companies, whereas Route 128 came to be dominated by a few self-sufficient corporations. Saxenian demonstrates that Route 128 was slow to adjust to changing markets because skill and technology remained confined within independent firms. In contrast, companies in Silicon Valley created a regional advantage by drawing on local knowledge and relationships to create new markets, products and applications. In doing so, they blurred the traditional boundaries among customers, supplier and competitors. The result of numerous interviews with executives, entrepreneurs and policymakers, this analysis highlights the importance of local sources of competitive advantage in a volatile world economy. It also underscores the need to develop regional, as well as national and sectoral, economic policies.