Recent theoretical achievements point out that knowledge' generation depends on the interaction of different underlying factors which are mainly related to: the evolution of the economic structure, the characteristics of local production systems and the emergence of new firm organisation practices. This work focuses on creation of codified and tacit knowledge in manufacturing sector firms in Lombardy. Particularly the creation of tacit knowledge appears to be strongly associated to small firms' clusters and, more precisely, to industrial districts. In small firms, moreover, tacit knowledge depends on the existence of long term work relationship, which some recent literature defines innovative flexibility. Codified knowledge depends directly on labour market dynamics and, indirectly, on education system functioning. A framework of policy proposal follows.