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In the 1970s and 1980s, industrial districts in Europe achieved international competitiveness and attained high employment standards, even though they were based on local small- and medium-sized firms and concentrated on traditional sectors. This makes them of special interest to less-developed countries in the South and East. This paper examines what policy lessons can be drawn from this European experience. It does so by focusing on the role of public and private institutions in four fields: (a) the provision of credit, (b) the training of workers and entrepreneurs, (c) the provision of real services, and (d) wage negotiations. The paper suggests that institutions played more of a role in later than earlier phases of growth. It points toward a new model of industrial policy based on local institutions but emphasizes that there is as yet little systematic assessment of the role of such institutions.