The development towards a knowledge economy is manifest not only in the growing service sector, but also in such 'traditional' sectors as agriculture and manufacturing industry. This chapter addresses the local dimension of the knowledge economy and policy options. It aims to elaborate the research questions and the methodology. An extensive literature study has enabled us to put together a survey of the 'state of the art', and to produce the building blocks for a theoretical framework. The chapter provides an overview of the literature about cities and urban policy in the knowledge economy. The paradox of the knowledge economy is business companies have become more flexible with the virtual abolition of frontiers and the internationalisation of the economy, they are more than ever tied to a location because they depend on highly-educated staff and on their integration into local knowledge networks.