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Federalism is an important institutional option for the management of difference in multinational states. A number of scholars have argued that the internal boundaries of such states should divide each constituent group into several federal units. In theory, boundary engineering of this type should activate cross‐cutting cleavages, subvert secessionist movements and, ultimately, foster political integration and stability. This article, by contrast, demonstrates the conditions under which the subdivision of territorial units can destabilise polities. Where statehood is a central symbol in nationalist narratives of constituent groups, the fragmentation of the sub‐state unit will be perceived as a threat to national identity of the group in question. The article compares former Yugoslavia and Nigeria, two cases in which such processes led to divergent outcomes.