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In the knowledge-based economy, firms are continually searching for ways to promote inter-firm interactive learning and for outside partners and networks to provide complementary assets. As they develop new products and processes, firms determine which activities they will undertake individually; in collaboration with other firms; in collaboration with universities or research institutions; and with the support of government. Although the arguments presented are well known in the field and a wide body of literature already exists that addresses these topics, the paper derives better model to understand network formation in a knowledge cluster by using causal-loop diagrams to present the mainly hypothetical relationships of various factors related to knowledge creation and diffusion. The paper does not provide any empirical support for the presented model, but the authors stress this work as being exploratory and generic.