Commonwealth Trade and Enterprise Papers report the results of studies on issues pertaining to trade and industrial policy and enterprise development in member countries. The work has either been carried out a Sponsored by the Commonwealth Secretariat. The Papers will be published on an occasional basis as work becomes available. In most countries, small and medium-sized enterprises (SMEs) account for the highest proportion of employment. SMEs in developing countries typically find it hard to become internationally competitive and offer products and services of the right quality services and governments and non-profit agencies often need to provide assistance. This paper identifies principles and best practices from world-wide experience with SME development assistance. Several of the principles and best practices discussed here are related to the development of firm-specific capabilities, while others are related to the development of industrial cluster capabilities. Clusters are characterised by geographical proximity, sectoral specialization and interfirm collaboration and competition. They provide an "information rich" environment with specialized labour pools, which help to diffuse information and knowledge. In order to provide a greater understanding of cluster dynamics, four case studies are presented. The development of both firm-specific and cluster capabilities are facilitated when there is an economic infrastructure rich in business development services (BDS). The use of business development services can be limited in practice, because of excessive administrative burdens, ineffective market segmentation and targeting, and ineffective communications. Focusing on some key characteristics when designing and delivering business development services can alleviate these problems.