National Governance Quality, Competition and Firm Investment

Abstract This study investigates how market competition affects firm investment and the moderating effect of national governance quality (CGI) on the relationship between competition and firm investment in research and development (R&D) and tangible assets. The sample consists of 16,493 observations from World Bank Enterprise Surveys (WBES) in 88 countries in 2016 – 2022. The regression results show that both the competition and the level of market competition encourage firms to invest more in R&D and tangible assets. The quality of national governance also adjusts the relationship between competition and firm investment. Notably, the better quality of national governance strengthens the relationship between competition and firm investment. However, it weakens the relationship between a higher degree of competition and firm investment. In addition, the marginal effects examination suggests that variations in the quality of national governance influence the relationship between competition and investment in R&D investment, which is more pronounced than tangible investment in the presence of at least one competitor. In conclusion, the relationship between competition and investment is moderated by changes in CGI, the starting level of CGI score, and the market structures. The empirical results propose some implications for firm managers and policymakers to boost investment and a transparent environment for firm investment.