An industrial cluster is a group of firms that are specialized by sector, located in close geographic proximity and consist of mostly small and medium sized enterprises. An introduction to these clusters is provided in Chapter One.

Chapter Two develops a model to examine the conditions under which clustered firms in a less developed country may cooperate in a "joint action" to market their output in a developed country, eliminating the role of an intermediary firm in the developed country. The clustered firms are heterogeneous in expected quality of output and know the quality type of other firms, but the foreign intermediary does not. The intermediary, however, has a lower marketing cost than the clustered firms. The main result of the model is that joint action can occur among high quality type firms, but the low quality firms always use the foreign intermediary to distribute their output.

Chapter Three examines empirically two aspects of collective efficiency, one passive and one active, through the analysis of a survey of the surgical instrument cluster in Sialkot, Pakistan. First, I test an idea from relational contracting theory that informal relationships can substitute for formal enforcement through the judicial system. Inter-firm trust is measured as the amount of trade credit offered to customers. The results show that suppliers are more likely to offer trade credit when they believe in the effectiveness of formal contract enforcement and when they participate in business networks (proxied by inter-firm communication). Customer lock-in helps to develop inter-firm trust since firms give more credit when relationships are of longer duration. This is because locked-in customers are less able to find alternate suppliers.

Chapter Three also examines the firm-level characteristics that determine the firms' interest in intra-cluster cooperation to market their own goods. The results demonstrate that firms are more likely to be interested in such initiatives once they have already had some direct experience in marketing, and when firms have a lower opportunity cost of leaving their current customers, where opportunity cost is measured by the length of the trading relationship.