Product market competition, corporate investment, and firm value: Scrutinizing the role of economic policy uncertainty

Olalere, Oluwaseyi Ebenezer; Mukuddem-Petersen, Janine Article Product market competition, corporate investment, and firm value: Scrutinizing the role of economic policy uncertainty Economies Provided in Cooperation with: MDPI – Multidisciplinary Digital Publishing Institute, Basel Suggested Citation: Olalere, Oluwaseyi Ebenezer; Mukuddem-Petersen, Janine (2023) : Product market competition, corporate investment, and firm value: Scrutinizing the role of economic policy uncertainty, Economies, ISSN 2227-7099, MDPI, Basel, Vol. 11, Iss. 6, pp. 1-18, https://doi.org/10.3390/economies11060167 This Version is available at: https://hdl.handle.net/10419/328792 Standard-Nutzungsbedingungen: Die Dokumente auf EconStor dürfen zu eigenen wissenschaftlichen Zwecken und zum Privatgebrauch gespeichert und kopiert werden. Sie dürfen die Dokumente nicht für öffentliche oder kommerzielle Zwecke vervielfältigen, öffentlich ausstellen, öffentlich zugänglich machen, vertreiben oder anderweitig nutzen. Sofern die Verfasser die Dokumente unter Open-Content-Lizenzen (insbesondere CC-Lizenzen) zur Verfügung gestellt haben sollten, gelten abweichend von diesen Nutzungsbedingungen die in der dort genannten Lizenz gewährten Nutzungsrechte. Terms of use: Documents in EconStor may be saved and copied for your personal and scholarly purposes. You are not to copy documents for public or commercial purposes, to exhibit the documents publicly, to make them publicly available on the internet, or to distribute or otherwise use the documents in public. If the documents have been made available under an Open Content Licence (especially Creative Commons Licences), you may exercise further usage rights as specified in the indicated licence. https://creativecommons.org/licenses/by/4.0/ Citation: Olalere, Oluwaseyi Ebenezer, and Janine Mukuddem-Petersen. 2023. Product Market Competition, Corporate Investment, and Firm Value: Scrutinizing the Role of Economic Policy Uncertainty. Economies 11: 167. https://doi.org/10.3390/ economies11060167 Academic Editor: ¸Stefan Cristian Gherghina Received: 21 April 2023 Revised: 1 June 2023 Accepted: 9 June 2023 Published: 14 June 2023 Copyright: © 2023 by the authors. Licensee MDPI, Basel, Switzerland. This article is an open access article distributed under the terms and conditions of the Creative Commons Attribution (CC BY) license (https:// creativecommons.org/licenses/by/ 4.0/). economies Article Product Market Competition, Corporate Investment, and Firm Value: Scrutinizing the Role of Economic Policy Uncertainty Oluwaseyi Ebenezer Olalere * and Janine Mukuddem-Petersen Graduate School of Business, University of Cape Town, Cape Town 8002, South Africa; [email protected] *Correspondence: oluwaseyi.olaler[email protected] Abstract: This study examines the effects of product market competition on corporate investment and firm value and the moderating role of economic policy uncertainty on this relationship. The firm-level data of 1971 listed corporate firms for BRIC (Brazil, Russia, India, China) countries during 2009–2020 were used, totaling 23,652 observations. Using the GMM estimates, our results depict that product market competition significantly influences corporate investment and firm value in BRIC countries. The result also reveals that economic policy uncertainty plays a significant role in the impact of product market competition on corporate investment and firm value at Brazilian, Russian, Indian, and Chinese firms. The study’s findings contribute to the body of knowledge by providing new evidence on the relationship between PMC, corporate investment, and firm value. These findings are vital for policymakers and regulatory bodies to focus on economic uncertainty in a competitive environment without jeopardizing investment returns in emerging markets. Keywords: corporate investment; product market competition; economic policy uncertainty; firm value JEL Classification: C33; D21; G20; G30 1. Introduction The past two decades have brought about rapid globalization of both product and financial markets, generating a series of innovation-driven economic development policies that promote market integration and encourage intense competition for significant economic recovery. Theoretical studies argue that globalization increases competition in the product market, which influences corporate investment decisions. Six reasons are specified in the literature through which globalization of economic activities can increase competition (Mello and Wang 2012;Frésard and Valta 2016): first, increase in the flow of trade and foreign direct investment; second, reduction in barriers; third, rapid information diffusion; fourth, greater transfers in technology and processes; fifth, cross-border labor migration; sixth, geographical convergence of prices (Mello and Wang 2012;Frésard and Valta 2016). The combination of these factors has resulted in increased competition among firms in domestic markets, and these competitive pressures not only influence corporate investment decisions but also affect the cash flow stability of firms. As a result, many critical questions remain unanswered, such as “Does product market competition (PMC) impact corporate investment and firm value?” and “What is the moderating role of economic policy uncertainty (EPU) on the relationship?” Thus, this research addresses these fundamental questions. Classical economic theory argues that competition in the product market is an essential driver of economic efficiency and, thus, has profound implications for corporate investments and firm value. According to Schumpeter’s (1912) creative destruction theory, firms in highly competitive markets are more likely to invest in innovative activities and earn additional profits from their innovations. This predicts that corporate managers are under Economies 2023,11, 167. https://doi.org/10.3390/economies11060167 https://www.mdpi.com/journal/economies Economies 2023,11, 167 2 of 18 enormous pressure to optimize profits by increasing efficiency to remain competitive in the product market (Giroud and Mueller 2011;Li et al. 2020). Proponents of the industrial organization view assert that competition is determined by the industry dynamics, such as the extent to which a firm controls market share, i.e., industry concentration. Abdoh and Varela (2017) suggest that competition bolsters valuable investments when a firm is not financially constrained and reduces investments when they are financially constrained. Studies also revealed that economic policy uncertainty reduces corporate investments and, thus, firm growth (Wang et al. 2014). Similarly, Ahsan et al. (2021) believe that uncertainty may also influence a firm’s operating environment, reducing future investment opportunities and firm growth due to new and changing economic policies. Uncertainty is triggered by economic shocks, which can decrease long-term investment and output for businesses due to rising expected costs. More importantly, corporate investment is usually costly and irreversible. Changes in policy impact how businesses operate and, consequently, how they make investments. Aside from political factors, policy uncertainty is typically linked to unforeseen economic events that influence firms’ expected return to discount their future cash flows. Pastor and Veronesi (2012) argue that EPU raises operating costs, lowers investment, and causes economic contraction. Ongoing policy reform may increase uncertainty, delay investments, and possibly influences the firm’s response to competition in product markets. Consequently, Akdo˘gu and MacKay (2008) document that firms operating in a highly competitive market invest more rapidly than those in monopolistic industries. An alternative argument posited that competition raises uncertainty’s negative effects on investments due to the risk of operating in competitive marketplaces. In addition to theoretical justification and empirical evidence, we consider that BRICs’ global investment climate is relatively mature to form a more particular and comprehensive hypothesis. The BRICs countries are dynamic to the world economy with rapid economic growth, as evidenced by the average GDP growth of 25% nominal and USD 16.039 trillion. Over the years, these countries have contributed to the global economy’s growth and development. Currently, the stakes are higher than ever before because emerging economies have become central to the global economy. Unlike the findings in existing research, this study has significant theoretical and empirical implications. First, there is a lack of empirical evidence focusing on emerging economies, such as the BRIC (Brazil, Russia, India, and China) countries. Second, there is a dearth of research on the role of EPU on PMC, corporate investment, and firm value in the empirical literature. To our knowledge, the findings of this study from the emerging market’s perspective are new. Several studies have argued that various policy uncertainties have a major impact on corporate behavior (Khan et al. 2019;Wang et al. 2017;Chen et al. 2017) and that firms in emerging economies face various types of uncertainties that have a major influence on corporations. Our study assumes that these uncertainties (particularly policy-related ones) are more likely to significantly affect the relationship between product market competition, corporate investment, and firm value of firms across BRIC countries. The contribution of this study is crucial for analytical and apparent reasons. Since these countries have distinct characteristics, such as policies toward economic openness, regulatory frameworks, and competitive environments, they are classified as one of the most sophisticated emerging economies regarding potential investment destinations (Fedderke et al. 2017). Hence, our study offers a robust and informative analysis of each country. Third, we apply a GMM model estimation to understand the dynamic role of economic policy uncertainty on PMC, corporate investment, and firm value nexus. The study focuses on listed corporate firms in BRIC countries using sample data from 2009–2020. Overall, this study empirically contributes to the literature in multiple ways. Firstly, the findings of this study revealed that product market competition significantly influences corporate investment and firm value of firms. Secondly, the results also show that the interactive term PMC*EPU significantly impacts corporate investment and firm value. These findings have important implications for emerging economies. Finally, we utilize an Economies 2023,11, 167 3 of 18 alternative measure of competition using the Herfindahl–Hirschman index (HHI) method to provide a concentration effect on corporate investment and firm value. The remaining sections of this study are summarized as follows. Section 2reviews the literature. Section 3 discusses the data and empirical methods. Section 4presents our findings and discussions. Section 5concludes the study. 2. Literature Review The theoretical literature on the link between competition, corporate investment, and firm value remains ambiguous and relatively new, particularly in emerging economies. There are still conflicting arguments on the relationship, and exploring the role of EPU on the nexus is novel. A study documented that increased product market competition reduces not only market power and expected profit but also increases the risk to a firm’s future cashflows (Frésard and Valta 2016). Theoretical arguments also reveal that a high PMC increases the risk of business failure perceived by investors and market participants. A seminal study on product market competition confirmed its effect on investments and economic productivity (Stigler 1958). Similarly, studies have shown that competition in the product market has a significant effect on investment (Jiang et al. 2015;Abdoh and Varela 2017), asset pricing (Bustamante and Donangelo 2017), and corporate cash holdings (Alimov 2014). Empirical evidence suggests that firms’ investment and financing decisions are linked to the competitive structure of the product market and the strategic interactions among market participants. Irvine and Pontiff (2009) state that the idiosyncratic volatility of stock returns and operating cash flows have significantly increased in recent decades. They ascribe the changes to intense competition. However, others argued that firms in highly concentrated markets have reduced idiosyncratic volatility compared to those that operate in competitive markets. Stoughton et al. (2017) argue that increased competition results in sub-optimal investment among firms. This suggests that PMC is also likely to reduce predicted profits, adversely influence firm efficiency, and increase the likelihood of failure (Lemma et al. 2018;Babar and Habib 2021). The study by Laksmana and Yang (2015) reveals that competition encourages corporate firms to invest in risky investments but also restrains management’s use of free cash flow. The study reinforces that competition encourages efficient managerial behaviour because shareholders may compare managers’ performance to the performance of other firms. Jiang et al. (2015) found a positive relationship between PMC and corporate investment in Chinese manufacturing firms. The study reports that leading industries invest more, and such positive relationships are linked to environments characterized by rapid and predictable growth. According to the findings of Akdo˘gu and MacKay (2008), competition encourages firms to accelerate investment activities. This is because the value of postponing investment diminishes when investment opportunities are uncertain. The study by Abdoh and Varela (2018) demonstrates that competition enhances cash-flow investments; however, this is only true for firms that are not financially constrained. The findings suggest that competition reduces managerial slack and induces corporate executives to invest in value-added activities. In addition, Sabherwal and Thai (2019) explore the relationship between competition and cash holdings by employing a Tobit regression over the period of 1999–2015. The result demonstrates that increased (decreased) competition across countries correlates with increased (decreased) cash holdings. This relationship, however, deteriorates when firms face higher financial constraints. Lyandres and Palazzo (2016) found an inverse relationship between a firm’s cash holding and their competitors. The study argued that as a firm accumulates more cash, the possibility that a firm will invest more in innovation increases as well, reducing competitors’ future earnings and the marginal advantage of cash holdings. This view was supported in the study by Aghion et al. (2005), confirming that competition tends to increase the innovative activities of top firms while decreasing the propensity for small firms to innovate. Likewise, Minniti (2010) explains that competition forces firms to invest more in Economies 2023,11, 167 4 of 18 developing new products to replace outdated items. Furthermore, while theories may have suggested that competition improves efficiency and discourages managerial slack, stakeholders generally oppose competition due to its adverse impacts on firm earnings. Ryu (2019) investigated the impact of PMC on stock returns of firms in Korea. The result reveals that higher competition in the product market negatively affects stock returns. Economic theory postulates that competition in product markets enforces discipline on risk-averse and effort-averse managers. It asserts that an increase in market competition has two opposite effects on managerial incentives. When competition increases, the likelihood of failure and performance-related job loss increases too (Sheikh 2018). On the other hand, increased competition lowers profits, and the value of any cost reduction benefits of higher effort. Hence, the overall effect may be ambiguous. Competition plays a vital role in a well-organized market. It helps lower prices, fosters innovation activity, results in less moral hazard, and provides good product quality to market participants. However, on the one hand, intense competition generates more consumer choices, so firms overuse resources to retain them. On the other hand, fierce competition induces firms to postpone investment, losing profitable opportunities. Theoretical and empirical studies have affirmed the existence of a relationship between PMC, corporate investment, and firm value. However, there is conflicting evidence regarding the relationship between PMC, business investment, and firm value. Stoughton et al. (2017) contend that a high degree of PMC leads to ineffective investments. The study explains that a firm’s information environment plays a crucial role in its investment decisions. Opposing arguments, however, suggest that PMC improves investment and expected profit when firms operate in an environment with high, predictable growth (Jiang et al. 2015). These conflicting views allow the study to address the inconsistencies in existing studies. Therefore, the study postulates that PMC significantly influences corporate investment and firm value. H1.PMC significantly influences corporate investment. H2.PMC significantly influences firm value. The theoretical study asserts that under the condition of EPU, firms cannot accurately predict whether existing policies will change, or the timing, direction, and extent of future changes in a fierce market competition. Some studies argued that policy uncertainty shocks can cause problems by reducing capital resources, raising financial capital costs, and lowering firm performance and value (Ma and Hao 2022). Market expectations for firm value and profitability are lowered as a result of economic policy uncertainty, which also lowers corporate investments and real asset returns. Classical real options theory suggests that an increase in EPU will increase an investment project’s “wait” value, which will also be influenced by the behavior of its competitors. Economic policy uncertainty increases competition in the market, reduces the value of “waiting” and severely erodes the value of projects, and, thus, encourages firms to invest in innovation earlier. Hence, we can argue that economic policy uncertainty intensifies the degree of competition in the product market. The predictions of prior studies on the impact of economic policy uncertainty (EPU) on investment and performance are ambiguous and relatively diverse. For example, He and Niu (2018) provide evidence that the valuation of banks is negatively affected by the EPU. Similarly, Chen et al. (2019) found that corporate enterprises reduce short-term and long-term investment during severe policy uncertainty. Olalere and Mukuddem-Petersen (2022) present a different argument on how EPU influences firm value in emerging markets. Their findings posit that EPU affects firm value regardless of this diversity in the business environment and economic conditions. The study further argued that a fragile institutional environment could be attributed to the decline in firm value during higher EPU, meaning that consistent regulatory policy is critically crucial under economic reform. In other words, higher uncertainty adversely influences a firm’s operating environment due to a volatile Economies 2023,11, 167 5 of 18 policy environment. Hence, this study hypothesizes that EPU significantly moderates the nexus between PMC, corporate investment, and firm value. H3.EPU significantly moderates the nexus between PMC and corporate investment. H4.EPU significantly moderates the nexus between PMC and firm value. 3. Sample and Methodology 3.1. Data and Variable Measurements The study aims to explore the role of EPU on PMC, corporate investments, and firm value nexus of firms. The study uses sample data for the period (2009 to 2020) from 1971 listed corporate firms. The firm-level data in BRIC (Brazil, Russia, India, China) countries were extracted from the Eikon database. However, we did not consider South Africa due to the unavailability of complete data for the construction of variables on EPU. Essentially, we did not consider firms with missing variable data. The sample selection criteria include (1) a non-financial institution, (2) complete financial statements from 2009 to 2020, and (3) the firm’s financial statements containing the necessary information to construct the research variables from 2009 to 2020 (see Table 1). Hence, we exclude financial institutions, such as conventional banks, insurance companies, and real estate, and only firms with complete and sufficient data were selected during the sample period. In this study, 23,652 firm-year observations are used for statistical testing after applying the sample selection criteria. Table 1. The structure of panel data. Country Number of Firms Population Excluded from Population Full Sample Number of Observations Brazil 382 275 107 1284 Russia 614 504 110 1320 India 4313 3595 718 8616 China 4359 3323 1036 12,432 Total 9668 7697 1971 23,652 Sectors Brazil Russia India China Industrials 30 40 315 403 Equipment and services 17 13 35 51 Consumer cyclicals 15 10 107 128 Consumer non-cyclicals 12 9 69 44 Materials 10 13 93 110 Energy 3 11 18 21 Utilities 15 9 41 82 Healthcare 3 2 23 94 Information technology 2 3 17 103 Total sample size 107 110 718 1036 Source: authors’ computation. The Lerner index is used to measure product market competition because it provides a systematic review of market power, as illustrated in Equation (1). The Lerner index identified the degree of monopoly with the difference between the firm’s price and its marginal cost at the profit-maximizing rate of output (Elzinga and Mills 2011;Spierdijk and Zaouras 2017). Hence, a bigger difference between P and MC meant greater monopoly power. It is a more direct measure of PMC because it focuses on the pricing power apparent in the difference between price and marginal cost, thereby capturing the ability of firms to set prices above their marginal cost of production (Pontuch 2011;Elzinga and Mills 2011). It is directly linked with the long-run equilibrium conditions in a competitive market where Economies 2023,11, 167 6 of 18 price equals marginal cost. It takes the value of 0 in the case of perfect competition and 1 under absolute monopoly. Equation (1) is as follows: Lernerit =Priceit −MCit Priceit (1) In the case of corporate firms, we defined the Lerner index as the firm’s operating profit margin (sales revenue minus costs divided by sales revenue) (Pontuch 2011), where COGS is the cost of goods sold and SGA is selling, general, and administrative expenses (Datta et al. 2013). Hence, Equation (1) can be rewritten as follows: Lernerit =Sales revenueit −(COGsit −SGAit)/Sales revenueit (2) Corporate investment is measured as capital investment scaled by total assets in the previous year. The enterprise value scaled by earnings before interest, tax, depreciation, and amortization (EBITDA) is used to measure the firm value (Bhullar and Bhatnagar 2013). The EPU index by Baker et al. (2016) was extracted from the source and converted into yearly frequency by taking twelve-month averages. We use GDP growth to capture the stability and instability of economic activity, and the consumer price index (CPI) is used to capture the inflation rate (Alouane et al. 2022). Asset tangibility (TAN) is measured as net property, plant, and equipment divided by total assets. The firm size is measured by the natural logarithm of total assets, while the quality of management is estimated using the return on assets (ROA) (Ahsan et al. 2021;Kim et al. 2021). The total debt scaled by total assets is used to measure leverage, and the operating expenses ratio measures corporate efficiency. The firm’s cash holding is measured by cash and short-term investments scaled by total assets (Yung and Nguyen 2020). Hence, Figure 1illustrates the theoretical framework to show the variables in the study. Economies 2023, 11, x FOR PEER REVIEW 7 of 19 Figure 1. Theoretical model. 3.2. Model Specification and Econometric Method This study intends to examine the moderating effect of EPU on PMC, corporate investment, and firm value nexus. Furthermore, the test is conducted to determine the impact of PMC on corporate investment, and firm value, and to analyze the effect of joint interaction between EPU and PMC on corporate investment and firm value. To achieve these objectives, this study estimates the following dynamic regression model: 𝐶𝐼 =𝛼 +𝛿𝐶𝐼  +𝛽 𝑃𝑀𝐶 +𝛽 𝐶𝐻 +𝛽 𝐿𝐸𝑉 +𝛽 𝐸𝐹𝐹 +𝛽 𝑅𝑂𝐴 +𝛽 𝑇𝐴𝑁 +𝛽 𝑆𝐼𝑍𝐸 +𝛽 𝐼𝑁𝐹𝐿 +𝛽 𝐺𝐷𝑃 +𝜀  (3) 𝐹𝑉 =𝛼 +𝛿𝐹𝑉  +𝛽 𝑃𝑀𝐶 +𝛽 𝐶𝐻 +𝛽 𝐿𝐸𝑉 +𝛽 𝐸𝐹𝐹 +𝛽 𝑅𝑂𝐴 +𝛽 𝑇𝐴𝑁 +𝛽 𝑆𝐼𝑍𝐸 +𝛽 𝐼𝑁𝐹𝐿 +𝛽 𝐺𝐷𝑃 +𝜀  (4) 𝐶𝐼 =𝛼 +𝛿𝐶𝐼  +𝛽 𝑃𝑀𝐶 +𝛽 𝐶𝐻 +𝛽 𝐿𝐸𝑉 +𝛽 𝐸𝐹𝐹 +𝛽 𝑅𝑂𝐴 +𝛽 𝑇𝐴𝑁 +𝛽 𝑆𝐼𝑍𝐸 +𝛽 𝐼𝑁𝐹𝐿 +𝛽 𝐺𝐷𝑃 +𝛽 𝐸𝑃𝑈 +𝛽 𝑃𝑀𝐶 ∗ 𝐸𝑃𝑈 +𝜀  (5) 𝐹𝑉 =𝛼 +𝛿𝐹𝑉  +𝛽 𝑃𝑀𝐶 +𝛽 𝐶𝐻 +𝛽 𝐿𝐸𝑉 +𝛽 𝐸𝐹𝐹 +𝛽 𝑅𝑂𝐴 +𝛽 𝑇𝐴𝑁 +𝛽 𝑆𝐼𝑍𝐸 +𝛽 𝐼𝑁𝐹𝐿 +𝛽 𝐺𝐷𝑃 +𝛽 𝐸𝑃𝑈 +𝛽 𝑃𝑀𝐶 ∗ 𝐸𝑃𝑈 +𝜀  (6) The two-step system GMM model was used in this study. Some key factors influence our decision to use the GMM estimator. First, GMM addresses the potential endogeneity problem and the unobserved specific effects by using the lag of specific variables in the model. In idiosyncratic disturbances, individual-specific patterns of heteroscedasticity and serial correlation may be present. Second, it provides reliable and efficient predictions and less bias for studies with limited time observations and a constant time-series process. The GMM is considered a perfect estimator if the panel dataset has a short time dimension (T) and a larger country dimension (N). Third, given the high probability of correlation with previous occurrences (especially at time t − 1), the GMM has an autoregressive dynamic that must be considered. Figure 1. Theoretical model. Economies 2023,11, 167 7 of 18 3.2. Model Specification and Econometric Method This study intends to examine the moderating effect of EPU on PMC, corporate investment, and firm value nexus. Furthermore, the test is conducted to determine the impact of PMC on corporate investment, and firm value, and to analyze the effect of joint interaction between EPU and PMC on corporate investment and firm value. To achieve these objectives, this study estimates the following dynamic regression model: CIit =α0+δCIit−1+β1PMCit +β2CHit +β3LEVit +β4EFFit +β5ROAit +β6TANit +β7SIZEit +β8INFLit +β9GDPit +εit (3) FVit =α0+δFVit−1+β1PMCit +β2CHit +β3LEVit +β4EFFit +β5ROAit +β6TANit +β7SIZEit +β8INFLit +β9GDPit +εit (4) CIit =α0+δCIit−1+β1PMCit +β2CHit +β3LEVit +β4EFFit +β5ROAit +β6TANit +β7SIZEit +β8INFLit +β9GDPit +β10EPUit +β11PMC ∗EPUit +εit (5) FVit =α0+δFVit−1+β1PMCit +β2CHit +β3LEVit +β4EFFit +β5ROAit +β6TANit +β7SIZEit +β8INFLit +β9GDPit +β10EPUit +β11PMC ∗EPUit +εit (6) The two-step system GMM model was used in this study. Some key factors influence our decision to use the GMM estimator. First, GMM addresses the potential endogeneity problem and the unobserved specific effects by using the lag of specific variables in the model. In idiosyncratic disturbances, individual-specific patterns of heteroscedasticity and serial correlation may be present. Second, it provides reliable and efficient predictions and less bias for studies with limited time observations and a constant time-series process. The GMM is considered a perfect estimator if the panel dataset has a short time dimension (T) and a larger country dimension (N). Third, given the high probability of correlation with previous occurrences (especially at time t − 1), the GMM has an autoregressive dynamic that must be considered. In the GMM model, the Sargan and Hansen J test of over-identifying restrictions is used to test the instruments’ validity. The result validates that the models are well-specified (Roodman 2009;Kripfganz 2020). The Arellano–Bond test (AR2) confirms the absence of higher-order serial correlation in the model. According to Roodman (2009), the study can conclude that the GMM is an appropriate model because it allows for the generation of robust estimators with fewer assumptions. 4. Results and Discussion 4.1. Descriptive Statistics Table 2shows the descriptive statistics for each variable. The product market competition (PMC) has a mean value of − 2.9% with a 24% standard deviation. The corporate investment is estimated at 0.36% on average, with a 1.8% standard deviation. The firm value has a mean value of 19%, while economic policy uncertainty grew at an average value of 7.6% during the study period. The mean value for firm cash-holding is 0.24% during the study period. The leverage has a minimum and maximum value of − 23.81% and 83%, with an average value of 6.3%, whereas the average efficiency ratio is 0.81%. The mean return on asset ratio is 0.11%, while the size has a mean value of USD 22.5. The asset tangibility has a mean value of 1.09%. The inflation rate has a mean value of 4.5%. The average GDP growth rate in the BRIC countries is 0.6% for the study period. Economies 2023,11, 167 8 of 18 Table 2. Summary of descriptive statistics. Var Aggregate Data Brazil Russia India China Mean SD Mean SD Mean SD Mean SD Mean SD PMC −2.956 24.418 −0.3729 3.7135 0.4120 13.863 −15.682 286.602 −41.179 19.598 CI 0.3655 1.8608 0.0495 0.0444 0.0567 0.1382 1.1638 7.9707 0.0526 0.0528 FV 19.892 29.937 10.987 20.4185 12.879 59.007 13.515 17.859 46.907 358.024 EPU 7.6175 0.7095 7.6361 0.3948 7.7106 0.4211 7.0637 0.3456 7.9894 0.6987 CH 0.2488 0.2053 0.1223 0.1261 0.0987 0.1544 0.3621 0.2300 0.1992 0.1549 LEV 6.303 1.8128 0.4085 0.1764 7.3169 119.69 0.4947 0.2172 0.5514 0.2195 EFF 0.8134 5.7556 0.5824 0.5109 1.1049 1.2009 0.9978 0.7605 0.6785 7.8986 ROA 0.1154 0.6271 0.0950 0.0628 3.0730 36.370 0.1087 00.0860 0.0758 0.5398 TAN 1.0921 10.1484 0.3363 0.1660 3.3388 11.1344 0.2673 0.1993 0.2157 0.1593 SIZE 22.573 1.7029 22.4740 1.5682 22.5024 1.9684 22.858 1.9196 22.393 1.4861 INFL 4.5148 3.2709 5.5270 1.8706 6.9649 3.5184 7.1859 2.9900 2.2989 1.3733 GDP 0.6009 0.3739 0.0808 0.3192 0.0707 0.3387 0.5610 0.4253 0.7386 0.2003 Notes: PMC = product market competition; CI = corporate investment; FV = firm value; EPU = economic policy uncertainty; CH = cash-holding; LEV = leverage; EFF = efficiency ratio; ROA = return on assets; SIZE = firm size; GDP = gross domestic product growth; TAN = tangibility; INFL = inflation rate. 4.2. Estimation of Results The dynamic test results for the entire sample of firms in the BRICs countries are presented in Table 3. This study explores the direct influence of PMC on corporate investment (CI) and firm value (FV). We utilized the GMM estimator as a regression instrument. The J-statistic test results show that all models do not reject the null hypothesis, indicating that over-identifying restrictions are valid and model specifications are accurate (Arellano and Bond 1991). Furthermore, testing the AR(2) second-order serial correlation reveals that the ρ -value is insignificant at 0.05, implying that all models are free of serial autocorrelation issues. In addition, all lag( − 1) variables demonstrate significance at the 1% level, attesting to the dynamic characteristics of the model specification. Finally, the selection of dynamic model specifications has been validated. The results can, therefore, be further interpreted. Table 3presents the impact of PMC on corporate investment (Model 1). The Model 1 test results indicate that the coefficient of PMC (0.0377) positively and significantly affects corporate investment at a 5% level. The result shows that increased PMC tends to increase the corporate investment of firms. The results support the viewpoints of Jiang et al. (2015) who found a negative relation. They argued that competition drives managers to invest more in capital expenditure, R&D, and riskier investments to survive in the long run. The result also supports the argument that competition restricts managers from making bad investments by limiting the overinvestment of free cash flows. According to Abdoh and Varela (2018), competition bolsters significant investment when firms are financially buoyant. They argued that the level of investment is driven by a firm’s financial growth and value. Hence, the results of this test confirm and support the theoretical and empirical argument that an increase in PMC also increases corporate investment. The test results in Model 2 show that PMC positively and significantly affects firm value at a 1% level. This implies that a rise in PMC improves firm value. This finding aligns with research conducted by Gu (2016) who found a positive relation. The study claims that firms that operate in competitive markets earn higher returns but are only common among R&D-intensive firms. The study further argued that firms in a competitive market are more likely to engage in innovative activities and are, therefore, more likely to earn higher future stock returns. Firms in a competitive marketplace are more inclined to take risks and innovate, which should lead to higher stock returns in the long run. Thus, based on the test results obtained in models 1 and 2, this study concludes that the influence of PMC on corporate investment and firm value in BRIC countries occurs due to the highly competitive markets and investment flows. Models 3 and 4 show that the interactive term PMC*EPU negatively and significantly affects corporate investment and firm value. This shows that the interaction between PMC Economies 2023,11, 167 15 of 18 shows a negative and significant impact on firm value. The interaction term (PMC*EPU) negatively and significantly affects corporate investment. This suggests that an increase in EPU increases the negative effect of PMC on corporate investment. Furthermore, the coefficient of the interaction term (PMC*EPU) positively and significantly affects firm value at the 1% level. The empirical results reinforce the robustness of our previous findings in Tables 3–5. 6. Conclusions This study examines the effect of PMC on corporate investment and firm value, as well as the moderating role of EPU on the nexus. We use a panel of 1971 firms in the BRIC countries from 2009 to 2020, making up to 23,652 observations. The study uses the two-step system GMM model to provide correct and reliable estimations that address the model’s endogeneity problem. Our findings are diverse and contribute to the existing body of literature in several ways. First, we found that increased PMC adversely influences corporate investment at Brazilian, Russian, and Indian firms, while a positive relationship exists for Chinese firms. The findings suggest that while intense competition in the product market could bolster firms’ investment capacity, higher competition could also adversely affect a firm’s investment. In summary, competition yields a higher investment opportunity and enables corporate firms to become more financially secure. However, competition also prevents corporate managers from investing in risky investment projects, leading to a decline in return. The study also found that higher PMC leads to a decrease in the value of firms at Chinese firms, while an increase in PMC improves firm value at Brazilian, Russian, and Indian firms. Other control variables also have a significant impact on both corporate investment and firm value. Second, the moderating role of EPU on the nexus between PMC, corporate investment, and firm value reveals different findings for each country. At Chinese firms, our study found robust evidence that economic policy uncertainty weakens “the effect of PMC on corporate investment of firms, increasing the likelihood of intense competition in the product market. Furthermore, the EPU increases the impact of product market competition on the firm value, suggesting that EPU magnifies the impact of PMC on firm value at Brazilian, Russian, and Indian corporate firms. In addition, this paper documents a significant phase in understanding how EPU moderates the nexus between PMC, corporate investment, and firm value. Policymakers must develop and implement strategies to minimize economic uncertainty because, when it rises, investors act quickly. While policy uncertainty is probably unavoidable, many policy changes would make it difficult for firms to comply with regulations, reducing market efficiency and value. The study offers implications on how changes in firms’ competitive environments can influence both corporate investments and firm value. The robustness tests also corroborate our initial findings, signifying the relevance of the results to policymakers in emerging economies. 7. Managerial Applications Frequent changes in policy conditions are associated with a cost. Managers need to be aware that the uncertainty of the external environment is not conducive to the stability and sustainable development of corporate firms. Therefore, firms should establish and improve the procedures for forecasting and identifying economic policy uncertainties and pay attention to the dynamic adjustment of competition in product markets. In such a competitive context, it is imperative for managers to understand that economic policy uncertainty poses challenges and implies opportunities for future increased returns. Thus, despite its adverse effects on firms’ general and physical capital investments, rational and forward-looking firms can effectively shift and allocate resources to innovation projects to obtain more substantial long-term returns by increasing investments. Our study provides critical and practical implications to corporate managers, investors, and policymakers in emerging economies. Corporate managers could consider economic Economies 2023,11, 167 16 of 18 policy changes while making investment decisions that could affect the firm’s worth. This is increasingly important because, during a period of uncertainty, PMC could serve as a corporate governance tool to monitor managerial decisions and facilitate the evaluation of corporate value in comparison to the competitors. Furthermore, to bolster investment in a high-potential market, policymakers must consolidate traditional industrial policies with competitive and innovative policies to improve market mechanisms and promote fair competition among firms. It is also imperative for investors to use the EPU index as a mechanism for improving investment strategies. 8. Limitations and Recommendations for Further Study This study has some limitations, as with any other study. First, we only focus on a few selected countries, which are different from other regions across the world. Thus, generalizing the results of this study does not apply to other global economies. Second, due to the unavailability of data for some periods, we did not consider longer time series in the study. Alternatively, this study’s limitations are helpful, provide the potential for future research, and may help understand the link between PMC, investment, and firm value. This study was conducted under normal economic conditions, which is the study’s limitation. Further studies can examine how economic policy uncertainty influences the investment decisions of firms in comparison to developed and emerging economies. Future research can consider the impact of PMC on corporate investment during varying economic conditions (pre-financial crisis, normal economic conditions, and the COVID-19 pandemic period). Future studies can also consider other sophisticated econometric models that can explore the cause and effect of the relationship. Further studies can also consider an alternative measure, such as market capitalization or Tobin Q, to represent the firm value. Author Contributions: Conceptualization, O.E.O.; Visualization, O.E.O. and J.M.-P.; investigation, O.E.O.; writing—original draft preparation, O.E.O. and J.M.-P.; writing—review and editing, O.E.O. and J.M.-P. All authors have read and agreed to the published version of the manuscript. Funding: This research received no external funding. Informed Consent Statement: Not applicable. Data Availability Statement: The data that support the findings of this study are available from the corresponding author upon reasonable request. Conflicts of Interest: The authors declare no conflict of interest. Abbreviations PMC Product market competition CI Corporate investment FV Firm value EPU Economic policy uncertainty CH Cash-holding LEV Leverage EFF Efficiency ratio ROA Return on assets SIZE Firm size GDP Gross domestic product growth TAN Tangibility INFL Inflation rate (GMM) Generalized method of moments (HHI) Herfindahl–Hirschman index MC Marginal cost SGA Selling, general, and administrative expenses Economies 2023,11, 167 17 of 18 References Abdoh, Hussein Ali Ahmad, and Oscar Varela. 2018. Product market competition, cash flow and corporate investments. Managerial Finance 44: 207–21. [CrossRef] Abdoh, Hussein, and Oscar Varela. 2017. Product market competition, idiosyncratic and systematic volatility. Journal of Corporate Finance 43: 500–13. [CrossRef] Aghion, Philippe, Nick Bloom, Richard Blundell, Rachel Griffith, and Peter Howitt. 2005. Competition and Innovation: An Inverted-U Relationship. The Quarterly Journal of Economics 120: 701–28. 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