  Industrial development is the process by which economies learn how to produce
new products and services. But how do economies learn? And who do they learn
from? The literature on economic geography and economic development has
emphasized two learning channels: inter-industry learning, which involves
learning from related industries; and inter-regional learning, which involves
learning from neighboring regions. Here we use 25 years of data describing the
evolution of China's economy between 1990 and 2015--a period when China
multiplied its GDP per capita by a factor of ten--to explore how Chinese
provinces diversified their economies. First, we show that the probability that
a province will develop a new industry increases with the number of related
industries that are already present in that province, a fact that is suggestive
of inter-industry learning. Also, we show that the probability that a province
will develop an industry increases with the number of neighboring provinces
that are developed in that industry, a fact suggestive of inter-regional
learning. Moreover, we find that the combination of these two channels exhibit
diminishing returns, meaning that the contribution of either of these learning
channels is redundant when the other one is present. Finally, we address
endogeneity concerns by using the introduction of high-speed rail as an
instrument to isolate the effects of inter-regional learning. Our
differences-in-differences (DID) analysis reveals that the introduction of high
speed-rail increased the industrial similarity of pairs of provinces connected
by high-speed rail. Also, industries in provinces that were connected by rail
increased their productivity when they were connected by rail to other
provinces where that industry was already present. These findings suggest that
inter-regional and inter-industry learning played a role in China's great
economic expansion.
