Ownership Structure, Product Market Competition And Firm Performance

In this paper we analyse the impact of the product market competition and ownership structure on firm performance. We use a panel of more than 400 firms over the years 2000-2003. These firms are all in Chinese manufacturing and listed on the Shanghai Exchange or Shenzhen Exchange. First, we study the separate effects of competition and ownership concentration on firm level productivity growth. Next, we investigate their interaction: are they substitutes or complements?We take care of the crucial problem of potential endogeneity of explanatory variables by using GMM estimators proposed by Arellano and Bond(1991).We control for industry fixed effects and time effects affecting the rate of growth of productivity. We use the market share as one of the proxies for the product market competition.Our results indicate that product market competition has a positive and significant impact on performance. Concerning the effect of ownership concentration, we find a U-shaped relationship with performance. Firms with relatively dispersed ownership (no shareholder with more than 20 percent of shares)and firms, in which one shareholder has more than 50 percent of shares, have higher productivity growth than firms with an intermediate level of ownership concentration. This correlation between concentration of ownership and productivity growth is not explained by the type of the controlling shareholder. Finally, product market competition and good governance tend to reinforce each other rather than to be substitutes. Competition has no significant effect on performance for the firms with "poor" governance; on the contrary, it has a significant positive effect in the case of firms with "good" corporate governance.