Research related to the effect of product diversification on firm performance (PD- P, hereafter) in China has not yet paid attention to the heterogeneity of sub- national institutions in various regions in China. Specifically, this paper examines PD-P in China from a perspective of sub-national institutions. It further investigates whether state-owned enterprises are better than non- state-owned enterprises at taking advantage of sub-national institutional development to improve firm performance that product diversification leads to. This paper uses a sample of 37,856 observations of 124 insurance firms in 31 provinces of China over the period from 2005 to 2014. It finds that in China, product diversification of a firm in a region has a positive effect on firm performance in that region, but this positive effect holds true only in regions with a high instead of low level of sub- national institutional development. Furthermore, the positive moderating effect of sub-national institutional development on PD-P is stronger for firms with a high instead of low level of state ownership.