The machine tool industry is the foundation of the machinery industry. It could be an indicator of a country's level of industrialization. The machine tool industry has become one of Taiwan's most important industries after roughly sixty-year’s development. The development process of this industry is dynamic and evolutionary and requires holistic methodologies to understand. This research uses system dynamics to study the Taiwanese machine tool industry and identified the dominant structure behind the development process in terms of causal loop diagrams. The results showed that the development processes could be regarded as a three staged process where five dominant loops influenced the development respectively. The five dominant loops include: the accumulation of industry cluster and capacity, the accumulation of human resource, the accumulation of technology, the formation of industrial cluster, and finally the impact of offshoring in his industry. This study also discussed the impacts of the research findings