We propose regression-based tests for mean-variance spanning in the case where investors face market frictions such as short sales constraints and transaction costs. We test whether U.S. investors can extend their efficient set by investing in emerging markets when accounting for such frictions. For the period after the major liberalizations in the emerging markets, we find strong evidence for diversification benefits when market frictions are excluded, but this evidence disappears when investors face short sales constraints or small transaction costs. Although simulations suggest that there is a possible small-sample bias, this bias appears to be too small to affect our conclusions. THE QUESTION OF WHETHER OR NOT an investor can extend his efficient set by including additional assets in his portfolio has recently received considerable attention in the literature. If extension of the efficient set is not possible for a specific mean-variance utility function, the mean-variance..