In identifying and enacting roads to sustainable development in welfare states,

several divides fragment the research community as well as the public policies being

practised. First there is a major gap between what might be addressed as a

functional and a territorial rationale. The former is supported by those who in the

name of national development propose a concentration of efforts to advanced and

boundary-spanning innovation systems, staged as resourceful coalitions between

private business, policy-makers and the universities as major knowledge-creators. A

territorial rationale in contrast withholds that the power of development is nested into

the local community, its committed member firms and other stakeholders as a

collective. The outcome of an analytical inquiry into the construction of these

contradictory discourses is integrated into a three-dimensional model. These

dimensions are: the dominant

life-setting in the territory (place), the general outlook

of the people in the locality/region and the critical

competence needed to materialise

ideas that emerge in the context. Based on our earlier research we then frame

theoretically and illustrate empirically the argumentation in two Swedish territories,

the industrial district (Gnosjö) and an urban area (Gothenburg). Finally we propose

that the very bridging of these rationales or rationales both analytically and in practice

build a dynamic foundation for territorial development. The associated 'virtual'

rationale suggests the need for upholding an ongoing dialogue between contrasted

rationales along each proposed dimension. The paper concludes with the

implications of this view for public policy concerning localised business activity.