The alleged beneficial effects of regional industrial clusters for competitiveness and growth in developing countries have been subject to intensive study. A prominent place in the debate has been occupied by the collective efficiency approach. In this paper we extend that approach by incorporating insights from the literature on firm-level technological learning in development. The resulting framework is applied to the software cluster of Bangalore (India), to illustrate the ways in which spatial proximity of firms and other parties interacts with cluster knowledge creation in a dynamic environment. A number of new insights emerge, including the importance of "old economy" factors such as high demand for innovation, international technology transfer, low wages and strong technology and education institutions. To the extent that "new economy" regional factors also matter, spontaneous agglomeration advantages appear to be important alongside active collective efficiency.