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, cash-flow, 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

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.

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.

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-to-market 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 project becomes available. At date t, are the innovations that are serially independent standard normal, is the mean of the cash flow, controls the variance, the cash flow from the project which was invested at date j<t is given by the following:

(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:

(2)

(3)

If the firm owns some projects, the value of firm’s assets is given by its projects alive and we can define that equal 1 if the project is alive at time t, and zero otherwise:

(4)

Second, the valuation of Growth options can be written as:

(5)

Combining 2-3 and 2-4, we can get the value of the firm:

(6)

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 fix-investment ratio on the level of Profitability or growth, we use four specifications. We use four vector auto-regressions that involve cash-flow, fix-investment, growth opportunities, and profitability.

TableⅠThe growth of firms based on natural resource

Year / Growth
1998 / 0.3256
1999 / 0.2409
2000 / 0.3402
2001 / 0.1612
2002 / 0.2996
2003 / 0.329
2004 / 0.3833
2005 / 0.1032
2006 / 0.4136
2007 / 1.0703
2008 / 0.351
2009 / 1.3987

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.

TableⅡ Regression Results of Model (7),(8),(9),(10)

Variables / Model(7) / Model(8) / Model(9) / Model(10)
Profitability(-1) / -0.25 / -0.106 / -0.08 / -0.054
p-value / (0.000) / (0.000) / (0.048) / (0.000)
Cash-flow(-1) / 0.45 / -0.60 / -0.11 / 0.03
p-value / (0.025) / (0.04) / (0.07) / (0.27)
Fix-investment(-1) / 0.68 / -0.40 / -0.09 / 0.04
p-value / (0.057) / (0.038) / (0.018) / (0.25)
Growth(-1) / 0.11 / -0.49 / 0.25 / 0.04
p-value / (0.09) / (0.15) / (0.05) / (0.28)
p-value of n1 / (0.01) / (0.01) / (0.04) / (0.03)
p-value of n2 / (0.67) / (0.60) / (0.87) / (0.50)
p-value of Sargan test / 0.42 / 0.43 / 0.77 / 0.84

V. CONCLUSION