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