We empirically test whether firms that belong to a business group behave differently from stand-alone firms in their decisions regarding internal corporate governance, given product market competition. Existing literature has ignored the possibility that firm characteristics may differentially affect the relationship. We find that the member firms of business groups maintain better internal corporate governance in a non-competitive environment, whereas stand-alone firms do so in a competitive environment. We also find that the positive effects of internal corporate governance on firm value are stronger in a non-competitive environment only for stand-alone firms. We ascribe the detected differences in corporate behavior and performance to differences in the level of competitive pressure to which firms are exposed. When we classify the firms by asset size or product market leadership, we observe a similar pattern.