Industrial diversification depends on spillovers from related industries and nearby regions, yet their interaction remains largely unclear. We study economic diversification in China during the period 1990-2015 and present supportive evidence on both spillover channels. We add to the literature by showing that these two channels behave as substitutes when explaining new entries and exits, and by using acceleration campaigns of high-speed rail to address some endogeneity concerns with regional spillovers. Our findings confirm the role of relatedness and geographical distance in the diffusion of economic capabilities and support the idea that improvements in transportation can facilitate the diffusion of productive capabilities.