The impact of dynamic externalities on local economic development is analysed for the case of Morocco. Using annual data for 6 urban areas and 18 industrial sectors indicators for specialisation, diversity and competiton of firms within a particular region are constructed for the years 1985-1995. The effects of these and other explanatory variables on local economic activity are estimated using a dynamic panel data model with both individual and time specific effects. The estimation results suggest significant positive specialisation and diversity effects and significant negative competition effects asserting the importance of industrial structure for local economic development. The empirical evidence is robust to the measure of economic activity used in the analysis, i.e. either employment or value added.