Regulation, Competition, Diversification, Governance and Costs: An Empirical Analysis of Public Utility and Manufacturing Firms in Japan

The main purpose of this study is to investigate how regulation, competition, governance structure, and business diversification strategy affect the cost structure of firms. By using 358 observations comprised of public utility firms and manufacturing firms from 1989 to 2002, we estimate the translog cost function. From our empirical analysis, the following results are obtained: (i) The regulation factor does not affect the cost structure. (ii) Compared with the regulation factor, the competition factor shows a quite clear effect on a firm' s cost reduction. (iii) As a company diversifies further from its core industry into other industries, all of the firm' s business costs increase, indicating an apparent lack of economies of scope. (iv) The governance factor has an important effect on a firm' s cost structure. As the ratio of foreign shareholders increases and there is more dependence on one main bank, the costs of a firm decrease.