How to sustain competitive advantage through effective institutional arrangements is the core issue that Chinese firms are facing under institutional change context. Using data of listed companies in China from 2002 to 2005, the research studies the impact of external institutional environments and internal governance structure on firm competitive advantage. The empirical results indicate government governance quality, market environment level, ownership concentration, board independence, board specialization, interaction of ownership concentration and board independence have significantly positive correlation with firm competitive advantage. We conclude that normative external institutional environments and effective internal governance structure help Chinese firms gain sustainable competitive advantage, and that the source of sustainable competitive advantages should come from the macroscopic institutional competition by governments and microscopic corporate governance competition by firms

external institutional environments    internal governance structure    firm competitive advantage