The dark side of competition in developing economies: Evidence from closely held SMEs

Abstract

This paper investigates how product market competition affects the performance of closely held small and medium enterprises (SMEs) in developing economies. In contrast to prior findings that focus on large publicly traded companies in developed economies, we find that market competition has a negative effect on firm performance. Our findings are robust to different measures of competition and firm performance and survive after addressing endogeneity issues. We provide evidence that the adverse effect of competition is channeled through increased corruption. Our findings further suggest that firms respond to competition by attempting to acquire more financial resources and government support, adopt quality improvement and cost reduction policies. The adverse effect of competition is especially strong for smaller firms.