Clustering in service industries has scarcely been investigated, while there is huge evidence of a positive impact on innovation and competitiveness in the case of manufacturing industries. We address this by exploring the potential moderator effect that location externalities have on the triangular relationship between clustering, innovation and competitiveness. In this empirical study of 131 hotels located nationwide in the emerging destination of Colombia, we found a negative moderated mediation effect. The impact on competitiveness is higher when the location holds low levels of resources. We uncovered and discuss one of the reasons for explaining the heterogeneous impact of clustering on service firms.