I develop a theory of spatial diffusion of the rule of law, where “space” is conceptualized as shared memberships in economic international organizations (IOs). I argue that the rule of law diffuses as a result of economic competition and socialization. Outside evaluators, such as international leaders, activists, and most importantly, international firms and investors, often assess states’ attractiveness as a business venue by comparing them to similar states. The natural reference group for such comparisons is not just geographical neighbors, but also states with shared memberships in economic IOs. Responding to this evaluation, states identify members of their own reference groups and view them as competition for investment. As a result, states within the same reference groups converge on issues related to lowering domestic economic risks, which are referred to by the umbrella term “domestic rule of law.” The resulting process of policy convergence is further aided by socialization. Socialization may involve emulation of policies of similar states or “active” learning through norm entrepreneurs, who use the reference groups for both evaluation and access to their target audiences. I capture the theorized spatial processes using a multiparametric spatiotemporal autoregressive model (m-STAR) and find support for the prediction.