The objective of this article is to disentangle the combined effect of product market competition and corporate governance variables on firm performance. While the linkage between internal governance mechanism and firm performance is well established in several studies, the interaction between internal and external governance mechanism has received scanty attention in emerging market economies. Here we have shown the independent and interaction effect of ownership and competition variables on firm productivity. Contrary to conventional wisdom, we document that competition has in reality become a discernible force in developing economies. The econometric modelling result shows that while the stand-alone effect of ownership variable on productivity is mostly insignificant, there is a strong positive interaction effect with competition variables.
Aghion, P. , M. Dewatripont and P. Rey (1999), ‘Competition, Financial Discipline and Growth’, CEPR Discussion Paper No. 2128, Centre for Economic Policy Research, London .
2.
Aghion, P. and P. Howitt (1997), ‘A Schumpeterian Perspective on Growth and Competition’, in D. Kreps and K.F Wallis (eds), Advances in Economics and Econometrics: Theory and Applications, pp. 279–314. Cambridge: Cambridge University Press .
3.
Alchian, A. (1950), ‘ Uncertainty, Evolution, and Economic Theory ’, Journal of Political Economy, 58(3): 211–21 .
4.
Balakrishnan, Pulapre , K. Pushpangadan and M. Suresh Babu (2000), ‘ Trade Liberalization and Productivity Growth in Manufacturing: Evidence from Firm-Level Panel Data ’, Economic and Political Weekly, 35(41): 3679–82 .
5.
Bartelsman, Eric J. and Mark Doms (2000), ‘ Understanding Productivity: Lessons from Longitudinal Microdata ’, Journal of Economic Literature, 38(3): 569–94 .
6.
Becht, Marco , Patrick Bolton and Ailsa Roell (2003), ‘Corporate Governance and Control’, in G.M. Constantinides , Milton Harris and Rene M. Stulz (eds), Handbook of the Economics of Finance, pp. 3–109. North Holland: Elsevier Publisher .
7.
Berle, Adolf A. and Gardiner C. Means (1932), The Modern Corporation and Private Property. New York: MacMillan .
8.
Brander, James A. and Tracy Lewis (1986), ‘ Oligopoly and Financial Structure: The Limited Liability Effect ’, The American Review, 76(5): 956–70 .
9.
Caves, Richard Earl and Sheryl D. Bailey (1992), Industrial Efficiency in Six Nations. Cambridge, MS: MIT Press .
10.
Chakrabarti, Rajesh (2005), ‘Corporate Governance in India—Evolution and Challenges’. Available at http://papers.ssrn.com/sol3/papers.cfm?abstract_id=649857, accessed 18 September 2006.
11.
Cho, Myeong Hyeon (1998), ‘ Ownership Structure, Investment, and the Corporate Value: An Empirical Analysis ’, Journal of Financial Economics, 47(1): 103–21 .
12.
Das, Sandwip Kumar and Manoj Pant (2006), ‘ Measuring Market Imperfection in the Manufacturing Sector: Theory and Evidence from India ’, Journal of International Trade and Economic Development, 15(1): 63–79 .
13.
Dasgupta, Sudipto and Sheridan Titman (1998), ‘ Pricing Strategy and Financial Policy ’, The Review of Financial Studies, 11(4): 705–37 .
14.
Demsetz, Harold (1983), ‘ The Structure of Ownership and the Theory of the Firm ’, The Journal of Law and Economics, XXVI(June): 375–93 .
15.
Demsetz, Harold (1988), Ownership, Control and the Firm. Oxford: Basil Blackwell .
16.
Demsetz, Harold and Belen Villalonga (2001), ‘ Ownership Structure and Corporate Performance ’, Journal of Corporate Finance, 7(3): 209–33 .
17.
Demsetz, Harold and Kenneth Lehn (1985), ‘ The Structure of Corporate Ownership: Causes and Consequences ’, Journal of Political Economy, 93(6): 1155–77 .
18.
Fama, Eugene F. and Michael Jensen (1983), ‘ Agency Problems and Residual Claims ’, Journal of Law and Economics, 26(2): 327–49 .
19.
Goldar, Bishwanath and Suresh Chand Aggarwal (2004), ‘Trade Liberalization and Price-Cost Margin in Indian Industries’, ICRIER Working Paper No. 130.
20.
Goswami, Omkar (2003), ‘Getting There-Pretty Rapidly: The State of Corporate Governance in India’, in F. Sobhan and W. Werner (eds), A Comparative Analysis of Corporate Governance in South Asia: Charting a Roadmap for Bangladesh. Dhaka: Bangladesh Enterprise Institute .
21.
Griffith, Rachel (2001), ‘Product Market Competition, Efficiency and Agency Costs: An Empirical Analysis’, Working Paper No. WP01/12, The Institute for Fiscal Studies, London .
22.
Grosfeld, Irena and Thierry Tressel (2001), ‘Competition and Corporate Governance: Substitutes or Compliments? Evidence from the Warsaw Stock Exchange’, William Davidson Institute Working Papers Series 369, Centre for Economic Policy Research, London .
23.
Hart, Oliver (1983), ‘ The Market Mechanism as an Incentive Scheme ’, Bell Journal of Economics, 14(2): 366–82 .
24.
Holmstrom, Bengt and P. Milogrom (1994), ‘ The Firm as an Incentive System ’, American Economic Review, 84(2): 972–91 .
25.
Hu, Yifan , Frank Song and Junxi Zhang (2004), ‘Competition, Ownership, Corporate Governance and Enterprise Performance: Evidence from China’, HongKong Institute of Economics and Business Strategy, Working Paper No. 1111, Hong Kong .
26.
Januszewski, Silke I. , F. Jens Koke and Joachim K. Winter (1999), ‘Product Market Competition, Corporate Governance and Firm Performance: An Empirical Analysis for Germany’, Discussion Paper No. 99–63, Centre for European Economic Research, Mannheim, Germany .
27.
Jensen, M.C. and W. Meckling (1976), ‘ Theory of the Firm: Managerial Behavior, Agency Costs and Capital Structure ’, Journal of Financial Economics, 3(4): 305–60 .
28.
Kato, Atsushi (2005), ‘Product Market Competition and Productivity in Indian Manufacturing Industry’, Working Paper No. E/263/2005, Institute of Economic Growth, Delhi, India .
29.
Koke, Jens (2001), ‘Corporate Governance, Market Discipline, and Productivity Growth’, Discussion Paper No. 01–55, Centre for European Economic Research, Mannheim, Germany .
30.
Koke, Jens and Luc Renneboog (2005), ‘ Do Corporate Control and Product Market Competition Lead to Stronger Productivity Growth? Evidence from Market-oriented and Blockholder Based Governance Regimes ’, Journal of Law and Economics, XLVIII(October): 475–516 .
31.
Kole, Stacey R. (1996), ‘Managerial Ownership and Firm Performance: Incentives or Rewards’, Advances in Financial Economics, pp. 111–49.
32.
Kole, Stacey R. and Kenneth Lehn (1997), ‘ Deregulation, the Evolution of Corporate Governance Structure, and Survival ’, American Economic Review Papers and Proceedings, 87(2): 421–25 .
33.
Li, Weian and Jianbo Niu (2006), ‘Product Market Competition and Corporate Governance in China: Complementary or Substitute?’ IFSAM VIIIth World Congress . Available at www.ctw-congress.de/ifsam/download/track_1/pap00266_001.pdf, pp. 1–15, accessed 1 February 2007.
34.
Morck, Randall , Andrei Shleifer and Robert W. Vishny (1988), ‘ Management Ownership and Market Valuation: An Empirical Analysis ’, Journal of Financial Economics, 20: 293–316 .
35.
Nickell, Stephen and Daphne Nicolitsas (1999), ‘ How Does Financial Pressure Affect Firms? ’ European Economic Review, 43(8): 1435–56 .
36.
Nickell, S.D. , D. Nicolitsas and N. Dryden (1997), ‘ What Makes Firm Perform Well? ’ European Economic Review, 41(3–5): 783–96 .
37.
Palia, Darius and Frank Lichtenberg (1999), ‘ Managerial Ownership and Firm Performance: A Reexamination Using Productivity Measurement ’, Journal of Corporate Finance, 5(4): 323–39 .
38.
Panagariya, Arvind (2005), ‘ The Triumph of India’s Market Reforms: The Record of the 1980s and 1990s ’, Policy Analysis, 554(November): 1–24 .
39.
Pant, Manoj and Manoranjan Pattanayak (2005), ‘ Does Openness Promote Competition: A Case Study of Indian Manufacturing ’, Economic and Political Weekly, XL(39), 24–30 September: 4226–31.
40.
Patibandla, Murali (2006), ‘ Equity Pattern, Corporate Governance and Performance: A Study of India’s Corporate Sector ’, Journal of Economic Behavior & Organization, 59(1): 29–44 .
41.
Pound, J. (1988), ‘ Proxy Contests and the Efficiency of Shareholder Oversight ’, Journal of Financial Economics, 20(1–2): 237–65 .
42.
Pushpangadan, K. and N. Shanta (2005), ‘ Competition in Indian Manufacturing Industries: A Study Using Static and Dynamic Measures of Concentration ’, Icfai University Journal of Industrial Economics, 2(1): 34–40 .
43.
Rajan, Raghuram G. and Luigi Zingales (1995), ‘ What Do We Know about Capital Structure? Some Evidence from International Data ’, Journal of Finance, 50(5): 1421–60 .
44.
Ray, Saon (2004), ‘ MNEs, Strategic Alliances and Efficiency of Firms: Emerging Trends ’, Economic and Political Weekly, XXXIX(5): 434–40 .
45.
Roe, Mark J. (2004), ‘The Institutions of Corporate Governance’, Discussion Paper No. 488, pp. 1–27, Havard Law School .
46.
Schmidt, Klaus (1997), ‘ Managerial Incentives and Product Market Competition ’, Review of Economic Studies, 64(2): 191–214 .
47.
Shleifer, Andrei and Robert W. Vishny (1997), ‘ A Survey of Corporate Governance ’, Journal of Finance, LII(2): 737–83 .
48.
Smirlock, M. and W. Marshall (1983), ‘ Monopoly Power and Expense Preference Behaviour: Theory and Evidence to the Contrary ’, Bell Journal of Economics, 14(1): 166–78 .
49.
Srivastava, Vivek , Pooja Gupta and Arindam Datta (2001), The Impact of India’s Economic Reforms on Industrial Productivity, Efficiency and Competitiveness: A Panel Study of Indian Companies, 1980–97. National Council of Applied Economic Research, New Delhi .
50.
Stigler, G. (1958), ‘ The Economies of Scale ’, Journal of Law and Economics, 1(October): 54–71 .
51.
Stulz, René M. (1988), ‘ Managerial Control of Voting Rights: Financing Policies and the Market for Corporate Control ’, Journal of Financial Economics, 20(1–2): 25–54 .
52.
Unel, Bulent (2003), ‘Productivity Trends in India’s Manufacturing Sectors in the Last Two Decades’, Working Paper No. WP/03/22, IMF, Washington, DC .
53.
Varagunasingh, T. Valuthi (1993), ‘Production Functions for Applied Economic Research,’ in U. Sankar and T. Lakshmanasamy (eds) Methodology of Applied Economic Research. New Delhi: Sterling Publication .
54.
Varma, Jayanth Rama (1997), ‘ Corporate Governance in India: Disciplining the Dominant Shareholders ’, IIMB Management Review, 9(4): 5–18 .
