Businesses cluster to achieve agglomeration benefits. However, research in developing countries suggests that the economic environment limits small business’ propensity to benefit from agglomerations. The study examines the location, networking patterns, formal structures and owner characteristics of 1256 micro businesses from ten industries and thirteen sample areas in Toluca, Mexico. First, the thesis analyses whether clustering has a positive impact on the success rates of the surveyed enterprises, e.g. higher sales per employee. On an industry scale only Retail benefits from agglomerations economies. However, results of the neighborhood data show that specific areas benefit from urbanization economies. Overall, the study finds that businesses located within agglomerations, have higher levels of formalization, networking and professional training, hence constituting a more sophisticated base for economic development. Conclusions can be drawn for development policies and programs, arguing for a more differentiated approach of small business development depending on business location and cluster characteristics.