This chapter discusses the concepts of competitiveness of small enterprises and external economies generated by clustering. It also discusses Ahmedabad city in the state of Gujarat towards firming up the conceptual categories. The chapter presents recommendations for the development of clusters. Small enterprises in clusters are characterized by a relatively high degree of vertical specialization and tend to be dominated by a single person, the owner-entrepreneur. Flexible specialization is used to refer to a special form of industrial organization, which offers special opportunities to clustered small enterprises. It has been considered an alternative road to industrialization, based on technologically sophisticated, highly flexible manufacturing firms, who continuously innovate. Clustering and networking explain the success of flexible specialization and industrial districts. Clustering results in various types of external effects, for which we may use the umbrella term of ‘collective efficiency’. Similarly, the city or region can contribute through a positive environment, which we could call ‘urban’ or ‘regional efficiency’.