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

Abstract

This study examines how national identity affects firm behavior and performance as firms expand internationally. Prior studies show that firms often follow the location decision of 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, an important question because shared nationality, while facilitating foreign market entry, may also have unintended negative consequences. This study fills this gap by studying the positive and negative consequences of agglomeration by nationality and the behavioral mechanisms that account for the performance consequences. I, first, argue that agglomeration by nationality can lead to a trade-off for firms by enhancing the performance of exploitative innovation but hindering explorative innovation. Second, focusing on the negative consequences on explorative innovation, I explore behavioral mechanisms such as forming homophilic relationships and imitating strategic decisions that mediate the effect of agglomeration by nationality on firm’s explorative innovation performance in foreign markets. Finally, I explore firm-level characteristics that make some firms less (or more) likely to be negatively affected by agglomeration by nationality. Using a sample of non-U.S. pharmaceutical firms that conduct R&D in the U.S. from 1980 to 2006, I find empirical support for my theoretical arguments.