We extend the theory by proposing that industry concentration moderates the relation between institutions and firm performance. It is already known that institution matters (Makino, Isobe, & Chan, 2004) and that promarket reforms positively affect firms’ profitability in emerging countries (Cuervo-Cazurra & Dau, 2009). The explanation is based on transaction costs economics (Coase, 1937; Commons, 1934). However, it is not known whether this effect is the same for all industries. We built a database of 230,222 observations of 10,903 companies in 64 countries in a 23-years interval. Regressions tested the interaction between the Herfindahl-Hirschman Index (HHI) and six institutional variables, considering three dependent variables: ROA, ROE and 3-year compound annual sales growth rate. We ran fixed effects and hierarchical models. Results confirmed the hypothesis and were significant for the negative interaction between HHI and four institutional variables: voice and accountability, govern effectiveness, regulatory quality and control of corruption. Industry concentration moderates the effect of institutions on firm performance. The influence is clearer on informal institutions, like democracy protection, consumer rights and control of corruption. We then argue that strategies of expansion within the industry, as market share dominance, mergers and acquisitions and growth may fit better into weak institutional contexts.
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