Modern Chinese industry was obviously featured by spatial agglomeration. However, with constant industrial development, location distribution also presented diffusion from ports and coastal areas to inland. Using the survey data of industrial sectors in the 1930s, this paper empirically examines the reasons for industrial agglomeration and diffusion of modern China from the perspectives of location advantages and industrial agglomeration effect. It suggests that not only trade advantages have important effects on local industrial development, but also industrial agglomeration effect is an important factor affecting industrial development and location selection. Further study indicates local commercial trade development provides capital accumulation for the industrial sectors and leads to the increase in labor income & local purchase level, so developed trade can become local advantages of local industrial development and attract firm entry & agglomeration, thereby promoting industrial development. However, excessive industrial agglomeration also results in location advantages of the industrial sectors and advances industrial diffusion outside the cluster areas. The conclusions provide implications for reasonable guidance of industrial transfer and balanced development in current China.