InGaN is the basis of a new generation of light-emitting devices, with enormous technological potential; it is currently one of the most intensively studied semiconductor materials. It is generally accepted that compositional fluctuations resulting from phase segregation are the origin of the high luminescence efficiency of InGaN. Evidence to show that nanoscale strain inhomogeneity plays a fundamental role in determining the spectral properties of InGaN–GaN heterostructures is reported. For layers above a certain critical thickness, a strong spatially varying strain profile accompanies a nonplanar surface morphology, which is associated with a transition from a planar 2D to a Stranski–Krastanow-like 2D–3D growth mode; the strong dependence of the critical thickness on the local InN content of the growing films drives a non-linear growth instability. Within this framework, apparently disparate experimental observations regarding structural and optical properties, previously reported for InGaN layers, are reconciled by a simple phenomenological description.