In the past few years, in which the economies of most industrialized countries showed figures of stagnation phenomena, it has become increasingly evident from a variety of studies and official government policy statements that small and medium size firms are more and more regarded as generators of economic growth, as primary sources of technological change and--via job creation--as one of the major factors in maintaining social stability (see Rothwell and Zegveld, 1982). Economic growth does not take place uniformly on a nation-wide scale. Specific regions provide a specific incubator function for specific new activities. Research on the incubator hypothesis already has a long history since the early attempts of Hoover and Vernon (1959). The main question here is the identification of favourable locational conditions that act as attractors of new activities. In this framework, a regional profile analysis may be a useful analytical tool in order to identify by means of a strength-weakness analysis which regions are favourable candidates for the locational requirements of new firms (e.g., the regional entrepreneurial vitality, the industrial diversity, the available infrastructure, etc.) (see Ni]~amp et al., 1988). While traditional regional policy has primarily addressed itself to providing various incentives to firms to locate branch plants in development regions and to aiding establishments (such as the Voest-Alpine in Austria) already located in such regions, local authorities are nowadays increasingly focussing attention on the revitalization of indigenous regional resources which may trigger the creation of new--often knowledge-based--activities, particularly in the small firm sector (see also Keeble and Wever, 1986; Storey, 1982). This paper aims at discussing in more detail the regional development potential offered by the small firm sector. The paper is organized as follows: In section 2 the role of small and medium sized enterprises (SMEs) in the economy is discussed, in particular with respect to its employment and development potential In section 3 the innovative role of SMEs will be discussed in more detail. It will be argued in this section that the innovative potential of SMEs is co-determined by the regional incubator profile at hand. Some empirical evidence from the Netherlands will be presented in order to demonstrate the plausibility of the previous statement. Section 4 will then outline the principles of a multi-dimensional locational profile analysis for SMEs, while section 5 will descr~e the results of a case study in which a regional incubator profile is related to the specific regional importance of a set of SME branches. This