Both firms, keen to improve their competitiveness, and governments, keen to exploit new sources of economic and social progress, need to understand how innovation works in order to better stimulate it. The paradox of innovation is that it uses co-operation to enhance competition and to link many different actors in innovative clusters. In a knowledge-based economy, these clusters of innovative firms form around sources of knowledge. They are based on a sophisticated infrastructure in which knowledge is developed, shared and exchanged, and are characterised by highly concentrated and effective links between entrepreneurs, investors and researchers. Clusters can take a variety of forms, depending on their main technological and commercial areas of specialisation. In most cases they operate within localised geographical areas and interact within larger innovation systems at the regional, national and international level. With globalisation, dynamic clusters are becoming key factors in a country’s capacity to attract the international investment that generates new technological expertise, to interest investors in innovation (venture capital, etc.) and to benefit from the international mobility of skilled personnel. This book reviews the latest economic research on these issues, shows how technology policy makers in OECD countries are making practical use of the concept of clusters and suggests how government policies to foster innovation might best be refocused.