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Tourism is commonly promoted as a tool for economic diversification in peripheral regions that have traditionally relied on exporting natural resources (the staples'). However, developing tourism in these regions has often proven immensely difficult. Part of the reason for this is that tourism seems to require different institutional arrangements to those common in traditional staples economies. This paper analyses the case of the Flinders Ranges in South Australia to examine how the conflicting institutional requirements of tourism and staples industries impacted on the capacity of the regional economic system to innovate and diversify its staples-based economy to include tourism. The paper further documents how conflicts in the diversification process have been mitigated. The research concludes that harnessing tourism for successful economic diversification in peripheral regions requires fundamental changes to previous ways of operating, including new approaches to business creation, capacity building, education and knowledge exchange, networking and public-private interactions.