The recent discussion of the winners and losers from globalisation has given prominence to regional development and industrial clusters in the global organisation of production and know-how. Tuttlingen, in southern Germany, is the recognised world leader in the global surgical instruments industry. However, price competition from emerging low-cost locations in South and South/East Asia and Eastern Europe, and rapid technological developments in medical engineering pose new challenges for the Tuttlingen cluster. In the past, institutional joint action was one of the pillars of the cluster’s success, but there are doubts as to whether such institutions can face the new challenges. New public-private initiatives suggest a way forward, but it is too early to gauge their impact. In the past there were important examples of small and medium sized firms coming together in joint marketing, production, and research and development efforts. While they continue, local competition has become more intense, making inter-firm co-operation more difficult. Some firms do, however, co-operate with suppliers further down the value chain, particularly those in Pakistan and Malaysia. The new challenges are also leading to further differentiation, both amongst firms as well as between producers and traders within the cluster. The most radical forms of product and functional upgrading are being concentrated in the cluster’s leading large firms. Innovation seems to be linked to close ties with end-users, the concentration of knowledge in medical engineering, and changes in surgical practices and health care delivery. Thus, the cluster while the ‘big fish’ in its own pond of surgical instruments, is having to come to terms with being a ‘small fry’ in the larger sea that constitutes the global health care sector.