Competition and Corporate Governance

Different countries are having different corporate governance systems. For instance, in U.K. and U.S., it is understood that the threat of takeover of the company is a factor which ensures that the managers have to act in the promotion of the interests of the shareholders. In the countries like Germany, France and Japan, it is understood that the financial institutions like banks act as monitors for the corporate governance. But neither of the systems is fool-proof. At the same time, it may be argued that the competition among the corporations can act as the most efficient mechanism for ensuring the corporate governance. It affects the productivity of a firm in a positive manner. Stiff competition in the product market ensures that the management does not avoid its responsibilities; even if its internal monitoring is weak. Competition ensures that the management lethargy is less and less. It can definitely be claimed that competition provides a benchmark for measuring the performance of a company from inside, i.e. the management. The managers are forced to rely on high performance; otherwise they may end up in bankruptcy or closer. Competition induces the managers to put greater efforts for the purpose of costs reduction so as to avoid any possibility of being bankrupt. The aim of this paper is to show as to how the interaction of product market competition with corporate governance variables affects the performance of a corporation. The aim is show that how the competition in the product market can act as an externality to the corporate governance, and act as a check on the exercise Manager's discretionary power. There is no doubt that there is a perfect linkage between the internal governance mechanism and the performance of a corporation. But it has to be remembered at the same time that the external governance mechanisms including competition, as also of vital importance, though there has been a very little attention given to the interaction between internal and external governance mechanism in emerging market economies. Here the paper hastried to show the independent and interaction effect of ownership and competition variable on firm level productivity. This paper is advancing a study of the linkage between the product market competition and the corporate governance and the resulting effect on productivity and efficiency level of the corporation in the light of an emerging market economy.