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The recent process of production fragmentation and the rapid growth of firm clusters have been explained by the increasing need for output flexibility. Although the mainstream literature relates flexibility mostly to labour adjustments, this paper investigates sources of flexibility as being related to forms of inter-firm production. Two extreme cases are compared: industrial districts and monopsonistic clusters. The nature and the implications of production flexibility are discussed in both settings. It is argued that the governance structure of industrial districts affects the dynamics of inter-firm linkages, which in turn enables systemic flexibility to be achieved.