During the past few years, knowledge has played essential role for development of economy. As a result, a new concept of knowledge based economy has been developed. Knowledge based economy is responsible for creating wealth through exploring knowledge. In new millennium, knowledge has made significant impact on socio-economic changes. The proposed study of this paper performs an empirical investigation to determine fundamentals of knowledge based economy in Iran using grounded theory. The study determines five categories including development of innovation and entrepreneurship culture, knowledge creation and distribution, creating competition in economic environment and information and communication economy.