The aim of this paper is to empirically investigate the factors affecting the productivity of firms located in industrial districts. With this purpose, individual firm characteristics and the three classic Marshallian sources of external economies are combined within the framework of a Cobb-Douglas production function which is estimated using a sample of 1.968 manufacturing firms located in 45 industrial districts to be found in the Spanish region of Castilla-La Mancha. The methodology used in the estimation is the multilevel analysis which is especially appropriate for the analysis of hierarchical data structures. The results show that district external economies explain a large amount of the between-districts variation in labour productivity.