Abstract: This paper makes a theoretical analysis of the impact of market potential and trade openness on regional industrial diversification. Then it makes use of the panel data of China’s 30 provinces in the period of 2000-2014 to conduct an empirical test. The findings show that the improvement of both the regional market potential and the trade openness has a positive impact on the level of regional industry-unrelated diversification, while a significant negative impact can be found on the level of the industry-related diversification. That is to say, the improvement of market potential has formed the diversification of demands, directly leading to the agglomeration of a large number of unrelated industries; a higher level of foreign trade and market openness can promote the space agglomeration of a large number of unrelated industries, while at the same time, restraining the space agglomeration scale of the related industries. Comparatively speaking, the impact of trade openness on the regional diversifications is more significant. Furthermore, the impact of market potential and trade openness on the diversification presents a relatively significant heterogeneity during the period of stable macroeconomic development and when there is an external impact on the economy; meanwhile, there exist obvious differences in the marginal effects of industrial diversification at different regions.

Key words: unrelated diversification; related diversification; spatial agglomeration; heterogeneity; marginal effect