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The effect of industry concentration on the relationship between institutions and firm performance

We propose that industry concentration moderates the relationship between institutions and firm performance. It is already known that institutions matter and that, based on transaction costs economics, promarket reforms positively affect firms’ profitability in emerging countries. To test this, we built a database of 230,222 observations of 10,903 companies in 64 countries from 1990 until 2012. 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 our hypothesis and were significant for the negative interaction between HHI and four institutional variables: voice and accountability; governance effectiveness; regulatory quality; and control of corruption. Industry concentration moderates the effect of institutions on firm performance. The influence is clearer on informal institutions, such as democracy protection, consumer rights and control of corruption. We then argue that strategies of expansion within the industry, for example, market share dominance, mergers and acquisitions, and growth may fit better into weak institutional contexts.

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