The role of industrial clusters in the industrialization of many emerging economies continues to dominate the debate among policy makers and researchers worldwide. While recent discussions on this debate have focused on knowledge spillovers among participants within clusters, knowledge flows between non local networks and the cluster actors have not been accorded due attention in the literature. Further, the literature does not compare the relative impact of knowledge flows among firms within clusters and firms outside clusters. In this study, we attempt a comparative analysis of the role of knowledge flows in capability formation among firms in the Indian Information Technology sector (IT sector) across cluster and non-cluster locations. The empirical results suggest that at the firm level, leveraging of capabilities to enhance performance and networks to build capabilities is not automatic; structural features of the firms' location enable this transformation. Moreover, while capabilities affect performance of firms positively only in clusters, economies of scale and some strategies like quality certification used by firms impact performance of firms outside clusters. Interestingly, although economies of scale do not impact the performance of firms within clusters, they do, however affect the capability formation of firms within clusters only. Further, we found that local and national non-customer networks affect capability formation of firms within and outside clusters whereas international customer networks affect capability formation of firms within clusters only. These have implications for how firms can develop appropriate strategies to enhance their performance.

Keywords: Industrial Clustering, Information Technology industry, Networks, Capabilities