LAUSR

The effects of knowledge spillovers from neighbouring regions on regional industrial diversification should not be overlooked. Here we are referring to not only intra‐industry knowledge spillovers from neighbouring regions, but also the spread of knowledge from related industries in neighbouring regions. This paper also develops an analytical framework that pays more attention to the role of institutional proximity between regions and how it is associated with geographical and cognitive proximity, and acknowledges that institutional proximity may generate asymmetric effects in the process of inter‐regional knowledge spillovers. Using the Chinese custom database during 2002–11, we confirm that knowledge spillovers from neighbouring regions play a key role in regional industrial diversification. More importantly, inter‐regional knowledge spillovers are likely to occur more efficiently if two regions have similar institutional contexts. It is also shown that institutional proximity could generate asymmetric effects in inter‐regional knowledge spillovers.