The established fact that knowledge in society is always distributed and dispersed can be given a dynamic interpretation when perceived as the outcome of an ongoing deepening of the division of labour as suggested by Adam Smith. Individuals specialising on performing certain tasks are motivated to find solutions and notice peculiarities otherwise overlooked. Thus, this gives rise to the suspicion that the process of innovation and learning is fuelled by the development of distinct bodies of knowledge developed in independent organisations pursuing objectives of competitiveness. Specialisation and outsourcing, etc., aim at freeing managerial and other resources within the firm to be relocated in developing core capabilities or competencies and in enhancing the internal learning processes. The boundaries of the firm thus impact directly on the (possible) level of learning in the economy. However, developing distinct bodies of knowledge increases the cognitive distance that firms have to overcome when engaged in inter-organisational learning. This must imply that interorganisational learning is subject to thresholds, before the dispersed knowledge bases of firms have grown sufficiently apart for interacting to imply learning; and ceilings, after which the cognitive distance becomes too great for firms to bridge, and where learning, consequentially, will cease. The paper argues that geographical clusters constitute an unplanned and organically developed mechanism for reducing cognitive distance between firms and thereby the cost of knowledge transfer and utilisation, while at the same time maintaining the specialisation within and between firms necessary for creating new knowledge.