Innovation and entrepreneurship are the most important catalysts of dynamism in market economies. While it is known that entrepreneurial activities are locally embedded, mutual effects of entrepreneurs and their local regional environment have not been adequately addressed in the existing literature. In this article, we use agent-based simulation experiments to investigate the role of entrepreneurship in the emergence of regional industrial clusters. We present fundamental extensions to the Simulating Knowledge Dynamics in Innovation Networks model (Ahrweiler et al., Industry and Labor Dynamics: The Agent-based Computational Economics Approach; World Scientific: Singapore, 2004; pp 284-96) by using a multilevel modeling approach. We analyze the effects of changing entrepreneurial character of regions on the development industrial clusters in two simultaneously simulated regions. We find that an increase in the entrepreneurship of one region has a negative effect on the other region due to competition for factors of production and innovative outputs. The major policy implication of this finding is the limitation it posits on regional innovation and development policies that aspire to support clusters in similar areas of industrial specialization. © 2014 Wiley Periodicals, Inc.