Should Birds of a Feather Flock Together? Agglomeration by Nationality as a Constraint in International Expansion

This study examines how national identity affects firm behaviour and performance as firms expand internationally. Prior studies show that firms often follow the location decision by other firms from the same home country when moving abroad, which can lead to agglomeration by nationality in foreign markets. While foreign location choices are well understood, we know less about the consequences of agglomeration by nationality. This study fills this gap by studying the consequences of agglomeration by nationality and the behavioural mechanisms that account for the performance consequences. I argue that agglomeration by nationality can lead to homophilic relationships and imitative strategic decisions, thus restricting the diversity of information channels and limiting new knowledge flows, and eventually leading to negative innovation performance. More specifically, I argue that i) higher composition of employees with the same nationality, ii) alliance formation with firms of the same nationality, and iii) imitation of strategies of firms of the same nationality will mediate the effect of agglomeration by nationality on firm’s innovation performance in foreign markets. Using a sample of non-U.S. pharmaceutical firms that conduct R&D in the U.S., I find preliminary empirical support for my theoretical arguments.