Study on the Sustainable Growth of the Natural Resource Industry in
China
Xiao-yong Wang
School of Economics, HuaZhong University of Science & Technology, Wuhan, China
(think1993@126.com)
Abstract - In order to sustain the development of natural
environment, economy and society, it is necessary to make
great effort to develop the Circular Economy. This goal
needs to be accomplished by the sustainable capability of
firms based on the natural resource. This paper investigates
the relationship between the growth, fix-investment, cashflow, and profitability of above discussed firms. Using the
dynamic panel data from natural resource-based ninety-five
listed-firms in China, the findings show that there exist close
positive relationship between the growth and fix-investment,
and the trends of cash-flow and fix-investment are tortuous
upward, but the profitability declines in the corresponding
years. The conclusions that the growth of firms is supported
by the fix-investment and decline in profitability is caused by
structure imbalance investment prove that policy-makers
attach more importance on the short-term gains and neglect
long-term planning development in natural resource
industry.
Keywords – Growth, Fix-investment, Profitability, Firms
of Natural Resource
The natural resource-based firms which have right to
possess the natural resource or exclusive possession rely
on the consumption of resources by resources exploitation,
primary processing as the basic mode of production and
achieve firms' growth by the advantage of natural
resources as the core competitiveness of the type of
business. They play an important role in the development
of national economy. But with the consumption of
resources, the resource-based enterprises will be faced
with a transformation and growth of difficulties. It is
necessary to explore the characteristic of growth and the
capability of the sustainable development in the energy
industry. This paper focuses on the relationship between
the sustainable growth and fix-investment by the way of
empirically testing the development of the Circular
Economy in the natural resource-based listed-firms in
China.
The plan of this paper is as follows. In Section 2, the
literature about the growth of the firms and investment are
discussed. Variables and data statistics analysis are in
Section 3, The VAR model about variables and
estimations are in Section 4. In the last Section, we give
the conclusion and policy suggestions.
I. INTRODUCTION
With the development of the economy in the world
today, resources consumption has increased dramatically.
And a large number of mineral resources consumption has
restricted the development of the economy by the
population growth, which causes the ecological
improvement and environmental protection are severe day
by day. In this case, in order to make the economic
development of our country and national security, we
have to adhere to the scientific development view and
establish the resource-conserving, environment-friendly
development and utilization of mineral resource system in
mineral exploitation especially enhance the efficiency in
the process of the mining, selection, exploitation and
consumption. Therefore the national circulation economic
working conference is held and the importance and
urgency of the development of circular economy is
analyzed and overall thought and main measures are put
forward to speed up the development of circular economy,
which make the air of saving resources, reducing the
waste of resources and reducing emissions enveloped in
whole society. These goals as discussed above need to be
accomplished by the sustainable capability of firms in
energy industry or the natural resource-based firms.
II. LITERATURE REVIEW
The firm growth thought was born from the classical
economists, they think the enterprise growth is the major
cause of the division scale economy interest that is labor
production in improving the efficiency of the production
from the work division and specialization, which can
expand the scale of enterprise production and further
deepen the division of labor and cooperation in the
enterprise. The above process recycles and enterprise
growth is implemented through the enterprise scale
economy [1]. The new classical economics enterprise
growth theory, called enterprise scale adjustment theory,
is argued that the reason of the enterprises growth is scale
economy and the pursuit of scope economy. In the new
classical economics the interior of complex arrangements
in the enterprise are abstract away, which is seen as a
production function. The functions can adjust the
production to achieve optimal levels of scale process, in
the other words; from the sub-prime scale to the optimal
size of the process is called enterprise growth. The idea of
Coase[2] think the existence of the enterprise is that market
transaction cost is higher than the enterprise internal
management coordination costs. When the market
transaction is equal to the marginal cost of enterprise
internal management coordination of the marginal cost, it
is considered to reach the enterprise scale expansion
boundaries. Though the scholars are not agree with the
definition of growth, the enterprise growth is generally
considered to be the size of the enterprise increase
gradually as time passes. There are some kinds of
methods measured the size of the enterprise. Fordand and
Slocum [3] think that the scale of the enterprise
organization and the organization of enterprise field can
determine the growth of enterprise. Most of scholars think
that the measurement method of the scale of the enterprise
usually is according to different situation such as the
number of employees, the annual sales or total assets.
Lang, Ofck, and Stulz[4] show that there is a negative
relationship between the leverage and growth of firms, but
leverage does not reduce growth of firms which are
considered to have good investment opportunities, and it
has negative relationship with the growth of firms whose
growth opportunities are not recognized by the capital
market. Damodaran[5] thinks that the standard way of
using the cash flow, growth rate is difficult to get young
corporate value of realistic numbers because such
characters as growth rate of firms can not be defined.
Anderson and Garcia-feióo[6] study the relationship
among the capital investment, growth options and stock
returns, they show that stock of firms whose low(high)
book-to-market used by Fama and French[7] significantly
promote(reduce)
the
capital
investment
and
increase(decrease) their market value. Dawson [8] studies
that institutions affect growth and empirical relationship
between the institutions, investment and growth. His
results show that free market institutions accelerate the
growth. Fama and French [9] find that given the book-tomarket equity ratio and expected profitability, higher rates
of investment imply low expected returns. Carlin and
Mayer [10] find the strong relationship between the
characteristic of industries, growth and investment of
industries in different countries. Ramezani, Soenen, and
Jung [11] use multivariate analysis and show that while
there are more measures of earnings and sales growth, the
firms exist optimal point beyond which further growth
destroys the shareholder value and adversely impact
profitability.
Circular Economy is short for the Material Cycle
economy. Its meaning is that the process of investment,
enterprise production, product consumption and waste
production makes the traditional linear growth model
relying on the consumption of resources change into the
pattern of ecological resources circulation development in
the system of the people, natural resource and science&
technology. The traditional consumption of resources
destructs the environment of the human life and
production activities to the very serious degree. Pearce
and Tumer[12] formally adopt the word of Circular
Economy, discuss the material circulation problems from
the perspective of resource management. The conception
of the Circular Economy prevails since then. German is
the first country which deals with the waste by purring
only at the end of process waste processing instead for
prevents and reduces waste generation, at same time it
regenerates the waste recycling and establishes the
disposal programs of the waste. The procedure of waste
disposal can be described followed, reduce the waste
production at first, the next step is reusing the raw
materials, the third step is recycling, and then heat
recovery ,harmless disposal at last.
According to Berk, Green, and Naik[13] , the firm
operating in discrete time invests the project when the
{ (t ), t  j}
project becomes available. At date t, j
are the
innovations that are serially independent standard normal,
is the mean of the cash flow,  j controls the variance,
the cash flow from the project which was invested at date
j<t is given by the following:

C

1
C j (t )  I exp[C   2j   j  j (t )]
2
(1)
So the valuing the firm takes two steps which involve
the valuation of assets in place and the valuation of
growth options.
First, the valuation of assets in place can be written as:

V j (t )  I exp[C   j ]D[r (t )]
(2)
 j   j z cov( j (t ), v(t )], D[r (t )



( s t )
(3)
B[ s  t , r (t )], B[ s  t , r (t )]  exp[ ( s  t )r (t )   ( s  t )]
s t 1
If the firm owns some projects, the value of firm’s
assets is given by its projects alive and we can define
{ j (t ), t  j}j o
that equal 1 if the project is alive at time t,
and zero otherwise:

t
V (t ) 
j 0
j
j
(t )  b(t )eC   (t ) D[r (t )]
(4)
Second, the valuation of Growth options can be written
as:
Et {

z ( s)
max[Vs ( s)  I , 0]},Vs ( s)  I  I (exp[C   j ]D[r (t )]  1)
z (t )
(5)
Combining 2-3 and 2-4, we can get the value of the
firm:

z ( s)
(6)
b(t )eC   (t ) D[r (t )]  Et {
max[Vs ( s)  I , 0]}
z (t )
From the (6), we can learn that the value of the firm is
governed by the investment and the growth of the firm.
But there exists the relationship between the investment
and the growth of the firm when the growth opportunities
become the investment of alive project. As to the firms
based on natural resource, the standard which evaluates
whether the growth opportunities are feasible or realistic
is principle of the Circular Economy. How to assess the
degree or achievement of the development of the Circular
Economy in the natural resource-based listed-firm of
China? If the Circular Economy be developed, the natural
resource-based firm must improve the production process
and maximize the utilization rate of natural resources. It
will be reflected on the reduction of production cost and
efficient investment, especially, because the generation of
the waste or take advantage of reusing the material can
make a large number of other business income. In the next
section, we empirical test the above phenomenon as
discussed the growth of the firm and the fix-investment.
. III. VARIABLES AND DATA STATISTICS
In order to learn about the progress of the energy
industry at present in China, we must investigate the
natural resource-based listed-firms that own abundant
capital and have large scale production. There ninety-five
natural resource-based listed-firms in ShangHai and
ShenZhen exchange. These firms studied for calendar t,
1998-2009, have excluded those ST-firms and firms with
incomplete data. It is found that there are three types of
ultimate shareholders: central government controller,
local government controller, and nature person controller.
According to the accounting standards, it is thought that
the profit or net cash flow represents whether investment
of natural resource-based firm is efficient or not. And it
can also reflect utilization rate of natural resources.
We derive following variables: investment ratio, cash
flow ratio, and profitability and growth opportunities
database.
Fix-investment ratio= Fixed investment of Process
equipment divided by book assets at end of year t.
Cash flow ratio=Net operating cash flow divided by
book assets at end of year t.
Profitability= Net profit divided by book assets at end
of year t.
The growth rate of
main business net
income(Growth)= (main business net income at year t －
main business net income at year t-1)÷ main business net
income at year t-1.
Table 1 and Figure 1 describe the statistic character
which is Average variables of firms in every year mainly
provided. From figure 1, it can be learned about that the
trend of the fix-investment and profit is torturously rising.
On the other hand the trend of the profit is torturous on
the decline. In order to measure the impact of the fixinvestment ratio on the level of Profitability or growth, we
use four specifications. We use four vector autoregressions that involve cash-flow, fix-investment, growth
opportunities, and profitability.
FIG 1 Evaluation Index of Circular Economy
The natural resource-based firms
in
Fix-investment
0.12
Profit
Net-Cash Flow
0.1
0.08
0.06
0.04
0.02
0
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
IV. VAR-MODELS AND ESTIMATIONS
If using an Ordinary Least Squares (OLS) to estimate
the each equations, the estimating result will likely suffer
from biases due to unobserved firm-specific effect as well
as possible endogenous repressors. For a dynamic and
unbalanced panel, the more efficient methods were
developed by Arellano and Bond [14] and Blundell and
Bond [15]. We apply Generalized Method of Moments in
system (sysGMM) that can provide better estimators. For
each estimation, in table 2 we report p-value for the
Sargan test, p-values for the parameter estimates basing
on
standard-errors
asymptotically
robust
to
heteroskedasticity and p-values for the test on first-order
correlation (n1) and second-order correlation (n2) in the
residuals (We only provide the impact of the key
explanatory variables). The result of the regression tells us
that the growth has little impact on the profitability in the
long run but is more associated with fix-investment. The
same result is found in the regression of cash-flow. These
mean that the industry of natural resource depends on
investment to support its growth not on the efficient of
production.
Growthit    1Growthit 1   2 cashflowit 1  3 Fix  investmentit 1   4 Pr ofitabilityit 1   it (7)
Pr ofitabilityit    1 Pr ofitabilityit 1  2 cashflowit 1  3 Fix  investmentit 1   4 Growthit 1   it (8)
TableⅠThe growth of firms based on natural resource
Year
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
Growth
0.3256
0.2409
0.3402
0.1612
0.2996
0.329
0.3833
0.1032
0.4136
1.0703
0.351
1.3987
Fix  investmentit    1 Fix  investmentit 1  2 cashflowit 1  3Growthit 1  4 Pr ofitabilityit 1   it (9)
cashflowit    1cashflowit 1  2 Growthit 1  3 Fix  investmentit 1  4 Pr ofitabilityit 1  it (10)
TableⅡ Regression Results of Model (7),(8),(9),(10)
Variables
Profitability(-1)
p-value
Cash-flow(-1)
p-value
Fix-investment(-1)
p-value
Growth(-1)
p-value
p-value of n1
p-value of n2
p-value of Sargan test
Model(7)
Model(8)
-0.25
(0.000)
-0.106
(0.000)
Model(9
)
-0.08
(0.048)
0.45
(0.025)
0.68
(0.057)
0.11
(0.09)
(0.01)
(0.67)
0.42
-0.60
(0.04)
-0.40
(0.038)
-0.49
(0.15)
(0.01)
(0.60)
0.43
-0.11
(0.07)
-0.09
(0.018)
0.25
(0.05)
(0.04)
(0.87)
0.77
Model(10)
-0.054
(0.000)
0.03
(0.27)
0.04
(0.25)
0.04
(0.28)
(0.03)
(0.50)
0.84
V. CONCLUSION
This paper explores the sustainable growth in the
listed firms based on natural resource. We first construct
the framework of the firm value involving the growth
options and relationship between the investment and
growth opportunities. In order to further disclose the
factor controlling the growth opportunities of the firms,
the vector auto-regressions of growth, fix-investment,
cash-flow, and profitability are established. Using the
dynamic panel data, we empirical test the relationship
among the variables of Fix-investment, profitability,
growth. It can be found that the growth of the firms based
on natural resource depend excess on the fix-investment,
though the increase of the cash-flow reflect the
improvement of the investment efficiency is made, but the
up-trend of profitability is lower than the fix-investment
and net cash flow. This means that the growth of firms is
supported by the fix-investment, which is not sustainable.
The rising trend of cash-flow and decline on the profit
prove that firms make fix-investment attach more
importance on the short-term gains and neglect long-term
planning development in natural resource industry. It is
worth pointing out that the growth of natural resourcebased listed-firms is not stable, which lead to
overexploitation and structure imbalance in the
investment. As advocated in the principle of development
Circular Economy, the sustainable growth must be
supported by the efficiency of production. At the same
time, the above findings demonstrate that policy-makers
must pay more attention to investment which enhance the
profitability or the efficiency of production not
duplication investments.
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