Recent empirical evidence has demonstrated that business groups - i.e. sets of companies controlled by the same owner (s) - are widespread in the Italian economy, not only in the large firm sector but also among medium-sized firms. Indeed, the setting up or acquisition of new companies is the normal way through which firms grow. The article claims that in the case of medium-sized firms it is the group, rather than the single legal unit, that should be considered as the unit of analysis when studying the governance and organizational structure of firms. The authors propose a new explanation of business groups in small and medium sized firms, based on the integration of organization and governance aspects. A new dataset on business groups in the Italian economy shows that they are more widespread within industrial districts than outside them. Moreover it also shows that some organizational features of business groups are influenced by their belonging to industrial districts; indeed, groups located in industrial districts are less diversified and are more spatially concentrated than groups outside them. The article discusses how the agglomerative forces and the processes of knowledge generation and diffusion characterizing industrial districts can help explain this result.