Tourism destinations in peripheral areas are often large regions established by centralised government agencies to encourage collaboration between dispersed communities and foster innovation. Relatively little research attention has been paid to the impact that centrally defined destination boundaries have on whether and how small communities contribute to innovation at a regional level. This paper examines the case of Burra, a small town in rural South Australia. It analyses the networking, collaboration and knowledge exchange behaviour of tourism stakeholders in the context of the state-government-defined ‘Clare Valley’ tourism region. Data were drawn from a web-based social network analysis, in-depth interviews, historic document analysis and field observations. The study found that the local tourism system had limited aspirations and capabilities to collaborate with other towns in the region. Lack of regional engagement was only partially due to intra-regional competition and resistance to regional boundaries. More significant barriers included a local culture of operating in isolation, an embedded reliance on public sector leadership to manage systemic interactions, an aging system with limited ambition to change and an inability to harness in-migrants and externally based stakeholders to stimulate knowledge transfer. Changing the imposed destination boundaries would have limited impact on the operation of the local system. The paper concludes that effective regional destination development in peripheral areas needs to be better informed by more detailed understandings of local tourism systems and their capacities to engage.