A conventional 2D (two-dimensional) culture, in T-flasks or multi-well plates, is commonly perfo med for the stem cell development; however, it is time and labour consuming process. Moreover, it is impractical to scale-up to high cell number production. Growing stem cells inside bioreactor might be a solution. 3D bioreactor is not only a solution for scalable production but also a mimic environment for in vivo system. Herein, sparged-type bioreactors (e.g. airlift bioreactor) were chosen as bioreactors to differentiate murine embryonic stem cells (mESCs) into type II pneumocytes in the lung. There are two main sections in this thesis: the design of airlift bioreactor using computational fluid dynamics (CFD) and the differentiation of mESCs into the alveolar progenitor cells in a sparged bioreactor. The airlift bioreactors provide a better environment, which theoretically has been known to simulate the gas-exchange interface encountered in the lung alveoli. They require a low power input and provide a low shear environment with good mixing. The hydrodynamics (gas holdup, superficial liquid velocity, and shear rate) and mass transfer (kLa, the volumetric mass transfer coefficient) features of different airlift designs were determined by CFD. The simulations were based on a 3D transient model, Eulerian-Eulerian approach, and two-phase liquid/gas model with all phases being treated as laminar flow. The superficial gas velocity was varied from 0.001 m/s to 0.02 m/s. The simulation results indicated that the hydrodynamics were corresponded to the data found in literatures and the gas holdup were agreed with an experiment validation. The CFD results also suggested that in which range of superficial gas velocity (ug) that the system can be operated without any fluctuation in terms of the hydrodynamics. In addition, the airlift bioreactor is suitable for shear sensitive cells with high mass transfer rate, e.g. kLa, = 180 hr-1 at ug= 0.01 m/s and normoxia (20% O2) condition. Hence, the results from these simulations have been initially utilised as a promising hypothesis to design an airlift bioreactor for the scalable and automatable culture in multiphase bioreactors. For the second part, mESCs were encapsulated in a calcium-alginate hydrogel to create a 3D environment then the encapsulated cells weregrown in both 3D static culture, in a T-flasks, and the sparged bioreactor. The gas, 5% CO2 and 20% O2, was directly sparged into the bioreactor. The A549 conditioned medium was used to induced the mESCs to the endodermal lineages, targeting for the alveolar type II cells, type II pneumocytes. The differentiated cells expressed lung cell markers: SPC (pneumocyte type II), and FoxA2 (endoderm marker). In experiments, the relative expression of SPC markers reached the maximum level, 10-fold increase, at day 14 and day 20 for 3D static culture and the sparged bioreactor, respectively. After day 20 of the differentiation process, the pneumocyte-like cells in static culture trend to lose their SPC expression whereas the cells in sparged bioreactor maintain relatively high SPC markers. At the end of a differentiation protocol, day 30, it was observed that both systems highly expressed the endodermal makers, FoxA2, i.e. approximately 2000-fold increase for static culture and 5000-fold increase for the sparged bioreactor. In conclusion, the direct gassing in the sparged bioreactor not only enhanced the differentiation of embryonic stem cells into type II pneumocytes but also mimicked the in vivo environment in the lung therefore the differentiated cells can maintain the lung phenotype for a long term culture, up to 5 weeks in vitro culture. This in vitro system would be beneficial for drug screening and regenerative medicine applications. Open Access