This paper explored the knowledge dynamics of cultural industries in Yogyakarta Region. The aims of this paper are to explain how local knowledge is circulated and how new elements are added, as well as to find out how different kinds of knowledge are anchored. This thesis contributes to fill the gap of the lack of research conducted to explain knowledge dynamics in the context of Indonesian cultural industries. Cultural industries have been increasingly considered important towards economic development, whereas territorial knowledge dynamics (TKD) is considered as an update of the traditional territorial innovation models (TIM). The empirical part of this paper contains data collected from interviews with the representatives of sixteen firms, five government institutions, three local trade associations, one local youth organisation and one non-governmental organisation. The finding reveals that direct observation, face-to-face contact, and local buzz are important towards the circulation of local knowledge within the clusters. Different kinds of innovations were also found, involving multidimensional aspects at micro-levels. In a few cases, innovation was influenced by the presence of global pipelines. Knowledge anchoring happened in a complex process and involved a number of actors in multiple locations and scales. This thesis argues that policy makers should increasingly incorporate the concept of territorial knowledge dynamics (TKD) in the development of Indonesian cultural industries.