How Can Imitation Increase Inter-Firm Heterogeneity?

Imitation is thought to lead to a decrease in inter-firm heterogeneity. This outcome rests on the assumption that imitation engenders only one type of implication for the imitating firm: an endowment of knowledge (technologies, product designs, strategies, etc.) about successful practices that makes the imitator more similar to its target. Yet research in the Carnegie tradition points to a second mechanism — imitation moderates a firm's post-imitation adaptation, which we term the generative effect of imitation. In this paper, we use a computational model to examine the implications of this dual role of imitation for inter-firm heterogeneity. As intuition suggests, we find the endowment effect of imitation reduces inter-firm heterogeneity. However the generative effect of imitation is double-edged: it tends to make firms more similar in practices but more different in performance. Our results suggest that the generative effect of imitation produces a bimodal performance distribution; some firms achieve significant benefits from imitation, while many others find themselves significantly worse-off than they would have been had they foregone imitation. Because of its generative effect, imitation can lead to an increase in performance heterogeneity.