How do regions diversify over time? Inspired by recent studies, we argue that regions
diversify into industries that make use of capabilities in which regions are specialized. As the
spread of capabilities occurs through mechanisms that have a strong regional bias, we expect
that capabilities available at the regional level play a larger role than capabilities available at
the country level for the development of new industries. To test this, we analyze the
emergence of new industries in 50 Spanish regions at the NUTS 3 level in the period 1988-
2008. We calculate the capability-distance between new export products and existing export
products in Spanish regions, and provide econometric evidence that regions tend to diversify
into new industries that use similar capabilities as existing industries in these regions. We
show that proximity to the regional industrial structure plays a much larger role in the
emergence of new industries in regions than proximity to the national industrial structure.
This suggests that capabilities at the regional level enable the development of new industries.