Two　sources　of　economic　interaction　are　knowledge　spillover　and　technical　diffusion.　This　paper　proposes　a　structural　model　with　spatial　effect　in　knowledge　spillover　and　technical　diffusion　and　empirically　estimates　the　sources　of　economic　interaction.　The　empirical　results　demonstrate　that　economic　interaction　mainly　comes　from　knowledge　spillover,　and　the　effect　of　technical　diffusion　is　weak.　These　results　appeal　for　special　attention　to　be　paid　to　enhancing　the　effect　of　technical　diffusion　on　long-term　economic　growth.　Moreover,　the　knowledge　spillover　effect　within　China　is　only　slightly　larger　than　that　in　the　global　setting,　implying　existence　of　barriers,　particularly　institutional　impediments,　to　economic　interaction　in　China.　The　findings　of　this　paper　strongly　call　for　the　removal　of　China＇s　hukou　system　and　local　protectionism,　which　restrict　factor　mobility　across　space.