Competition’s effect on the performance of the company depends entirely on the position, situation and capability of the company. The traditional economic theory suggests that increased competition brings the price of the product equal to the marginal cost and lead to effective and immense allocation of resources which means that competition isessential for companies to survive in the long run. Therefore, competition does affect performance but either negative or positive can not be certain (Hart, 1983; Shleifer &Vishny, 1986; Schmidt, 1997).
Competition brings in the fear of bankruptcy that drives the management and its employees to work hard and come up with new ways to beat competition which in turn helps the company grow. Tying personal benefits to organizational benefits is effective since it brings out the best in companies helping them grow and beat competition. Competition also brings out the aspects that comparable between companies and which urges management to find ways to come up to their competitors level or become better than them, hence competition brings growth (Aghion & Howitt, 1997). But competition to a certain moderate level results in growth otherwise it can eradicate a company as well ( Schmidt, 1997). Competition brings in more productivity and growth (Caves, 1992). Yet there are researches that prove the negative effect competition has on profit margins and such a research was conducted with a sample of companies inNorwayand it proved a negative relation between competition and profits or growth (Klette, 1999). Most researches conducted inGermany,Polandand China prove the positive relationship between competition and good performance or growth of a company (Shi Donghui, 2003).
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