Analysis on Investment Behavior of Agricultural Sector in China

Sun Zhuo

School of Economics and Management， Tongji University， Shanghai 201804， China

Analysis on Investment Behavior of Agricultural Sector in China

Sun Zhuo

School of Economics and Management， Tongji University， Shanghai 201804， China

In the process of industrialization， China has been a big agricultural country， and the agricultural sector's economic activities have been playing important role in economic growth. This paper established the investment behavior model of agricultural enterprises on the basis of Chinese practice. And then， the model presented the important factors impacting on investment， such as financing cost， wage， and policy factors， etc. Thirdly， this paper in particular used R-studio to estimate the impact of financing cost and policy factor on investment and capital accumulation of primary industry sector by gathering the data from 2003 to 2013. The results showed that the official interest rate of loans of financial institutions could be the proxy variable as the financing cost of agricultural enterprises， and the employment level of agricultural enterprises had negative impact on investment. Finally， this paper provided some explanations and suggestions on the basis of above results.

agricultural sector， investment behavior， financing cost， employment level

Introduction

Since the reform and opening up， China has been in the economic boom period， and the primary industry played important role in economic development. Meanwhile， investment has been the critical factor for promoting such high-speed economic growth and agricultural industry development. In recent decades，China achieved rapid development at economic growth rate of 7.4% and fixed asset investment rose by 15.7% in 2014. Especially， the average per capita growth rate of investment in the primary industry from 2004 to 2011 was 28.85% which was almost 5% higher than the national level. As a result， it is exactly important to stimulate and optimize agricultural investment for maintaining the rapid and sustainable economic growth. For the sake of promoting investment structure and share of agricultural sector， we should focus our research priorities on the investment behavior and its influencing factors in China.

Many researchers paid close attention to investment and had reached a consensus with respect to factors impacting on the investment behavior of firms. It is particularly notorious that financial constraint affects investment scales and returns in firms. Fazzari et al. （1988） proposed financial constraint hypothesis according to the information asymmetry and found that enterprise investment was under the influence of financial constraint. Henceforth， a lot of research achievements have been presented in this field， some scholars （Kashyap et al.， 1994； Hu and Schianterelli， 1998） supported arguments from Fazzari et al. （1988） as well. In view of specific situation in China， Feng （1999）， Li et al. （2006） and Wang et al.（2008） testified the impact of financial constraint on restricting investment and capital stock and the conclusions were also consistent with Fazzari et al.（1988）. Almeida et al. （2011） studied a model and verified that financing constraints led firms to havea preference for investments with shorter payback periods， and investments with less risk. Expect for enterprise situation of finance and demand for investing， Zeng （2013） argued that fluctuations in policy，technical progress， financial shock etc. also played important role on investment decision. Kang et al.（2010） assessed the impact of the Sarbanes-Oxley Act of 2002 on corporate investment in an investment Euler equation framework and concluded that the effects of the legislation on corporate investment were asymmetric and were much more significant among relatively small firms. Bolton et al. （2011） developed a model for predicting the financial crisis influence on investment， then showed quantitatively that real effects of financing shocks might be substantially smoothed out as a result of firms' adjustments in anticipation of future financial crises. Meanwhile， Chow et al. （2010）examined that soft budget constraint was significant relative with the ownership structure of enterprises. Zhang et al. （2011） found that the firms had political relations initiated over-investing more easily. Chen et al. （2011） tested that government intervention， as a form of friction， distorted firms' investment behavior and led to investment inefficiency.

Although， many researchers above have been studying on enterprise investment behaviors， there were not many papers paid close attention to studying on agricultural sector investment in the view of quantitative analysis. So we focused on agriculture department behaviors in China based on the former studies. And this paper organized as follows. In the second part， we established mathematical investing model which presented investment behaviors of agricultural enterprises.

The third part searched for suitable variables for describing investment behavior factors on the basis of data validity. Fourthly， this paper built the econometric model basd on above work for verifying our assumptions and found out the factors which affected agricultural enterprise investment. Finally， this paper summarized the conclusions deriving from previous study.

Models and Methods

Investment decision is a trade-off process which firms pursue for future benefits compensation at the expense of existing resources under information and resource constraints. Firms make decision of investment opportunity and quantity in accordance with their business objective. In China， primary industry has played important role in economic development: on the one hand， although rural labor force transported to secondary industry and tertiary industry， primary industrial labors still accounted for 31.40% of the total employed persons in 2013； on the other hand， for solving the problem of food supply and food security，agriculture， forestry， animal husbandry and fishery have to sustain appropriate level of output， so that agricultural enterprises could simultaneously face with two objectives which were profit and production maximization.

On the basis of the above analyses， we assumed that agricultural enterprises aimed to balance profit and production maximization according to the concrete condition in China. The firms' objective function could be presented as follow:

Where， ∏twas the enterprise objective including profit and production maximization； θtY∈（0， 1） was the weight distributed between the maximization of output and profit； ptcaptured the price of agricultural products； Yt（Kt， Lt） was the production function， Ltand Ktwere labor and physical capital； Itrepresented the firm investment which was loaned from bank； ωtwas wage； δ was capital rate of depreciation which was constant， and rtwas financing cost offered from banks. In terms of perpetual inventory method， physical capital stock at period t could be expressed as equation （2）:

Where， Ktwas state variable and Itwas control variable which adjusted capital stock.

We assumed that agricultural enterprises preferred different levels of operation targets in each period，and ρ was constant which presentd firm decline rate of time preference. Then， enterprises maximized the present value of targets as follow:

According to equations （2）-（3）， Hamilton function was built:

Let HC=e-ρ·t·H and m=eρ·t·λt， current-value Hamilton function could be expressed as follow:

Then， we could get the factors affecting physical capital stock through organizing equations （6）-（9）:

We assumed that production function Ytconfirmed with Cobb-Douglas functional formed as Yt=A·Ktβ·Ltα，and then equation （10） could be transformed as:

We let kt=Kt/Lt， equation （11） could be presented as:

Investment behavior is the process of physical capital accumulation and capital stock results from investment. Therefore， we could figure out form equation （12）:

（1） The higher capital output elasticity β， the greater capital output was. It indicated that the firms preferred to input more capital to increase production； rose labor output elasticity α to increase labor output and then the firms had to hire more labors to substitute for physical capital.

（2） When firms faced with the higher financing cost rtwhich indicated that the cost of capital increased，the firms had to reduce investment and replace capital with labor for creating more profit. Meanwhile， firms predicted credit interest rate was going up next period，and they pretended to raise investment at current period for reducing the future capital cost.

（3） The higher time preference ρ was， the firms operated in pursuit of short-term profit and had less investment intention to production. Normally， time preference was supposed to constant under smooth production environment.

（4） As the growth of production and employment，labor income ωtincreased constantly. Simultaneously，the raising of labor income implied employment cost going up； the firms should substitute more capital for labor input.

（5） The institutional factor gθtYwas one of the determinants as well， when the firms focused more on output at next period， they would create more investments in this period. This implied that investments was slightly higher than the situation without the influence of intuitional factors. As a consequence， agricultural enterprises accelerated capital accumulation under the influence of institutional arrangement.

Results

As to analyze the impact of market and institutional factors on agricultural enterprises' investment behaviors in China， firstly we attempted to transform mathematical models above to econometric model. And then this paper intended to choose primary industry as the sample to verify the suitability of investment behavior models. Some original data derived from the "Statistical Yearbook of China"，"China Labour Statistical Yearbook"， and National Statistics Database. And according to the availability and effectiveness of data， this paper decided to select 2003 to 2013 as the study period.

We could get the regression equation by taking bothsides of the equation （12） difference:

For equation （13）， we assume that: （1） on the basis of the above analyses， investor time preference and output elasticity of capital and labor should be constant which were reflected in constant term a0； （2） the increment of capital approximately equaled to investment，that was Δkt≈it； （3） the growth rate of financing cost was equal to zero， because the cost fluctuation remained steady， so Δg≈0. Hence， equation （13） could be simplified as

From equation （14）， we could notice that investment was mainly related to the change of financing cost Δrt，tendency of financing cost Δgrt， the increase of labor wage Δωt， policy factor gθtY， and other unobserved factors were included in residual term ut.

The variables in equation （14） could be expressed as the followings: （1） the dependent variable itwas investment per capita which could be calculated as total investment in fixed assets in agriculture， forestry，animal husbandry and fishery divided by the quantity of employment of primary industry； （2） generally，enterprises obtained credit from bank at loan interest rate （three years or less） Δrt， this paper firstly tried to use annual average lending interest rate which was published by the People's Bank of China； （3） the labor cost Δωtwas the average wage of employed persons in urban units by sector； （4） the proxy variable of policy factor gθtYwas the increment of employment in primary industry. The variables and data are shown in Table 1.

After generating the data above to equation （14），this paper used R-studio for empirical analyses， and the result of regression analyses is shown in Table 2.

Table 1 Influence factors of enterprise investment behaviors

On the basis of regression result from Table 2，investment behavior function of agricultural enterprises （equation （14）） could be expressed as:

According to Table 2 and equation （15）， we found that from 2003-2013:

（1） Investment was significantly positive with wage. This empirical result showed that the firms increased 1 785 Yuan investment per capita to replace labor with capital when employment cost went up 1 000 Yuan.

（2） Investment behaviors of agricultural enterprises could be explained appropriately by annual average lending interest rate. This implied that the lending rateannounced by Central Bank could express the financial cost of agricultural sector. When financial cost increased， the firms should cut investment accordingly for controlling production cost. As to official interest rates lagged behind the state of business， the significance level of the financial cost was not as high as wage.

（3） The preference of pursing for output maximization and guaranteeing employment also influenced investment behaviors. We found a significant inverse correlation between investment and employment. When employment increased 1 unit the investment per capita would decrease 0.14 unit. This implied that there had been serious labor force surplus in primary industry since 2003.

Table 2 Analyses on investment behaviors

Conclusions

On the basis of operating characteristics of the agricultural sector， this paper constructed agricultural enterprise investment decision model including capital cost， wage， factors resulting from policies， etc. As to testify the validity of the mathematical model above， this paper established econometric models for regression analyses by picking appropriate indicators and gathering related data from 2003-2013 in China. According to the above analyses， this paper made some conclusions as the followings:

Firstly， the factors affecting investment behaviors of agricultural enterprises mainly included the output elasticity of labor and capital， financing cost， wage， and anticipated financing cost， employment level and so on.

Secondly， the proxy variable of agricultural enterprises in expressing the financing cost was the lending interest rate announced by People's Bank of China. Official loaning interest rate was suitable to reflect the relationship between supply and demand for capital in agricultural sector.

Thirdly， institutional factor affected the investment decision of agricultural enterprises in China. Based on the above analyses， agricultural sector concerned both production and profit targets because of guarantying national production and consumption. Meanwhile，the investment of enterprises might be significantly decreased under institutional factors. This result could partly explain the labor surplus of agricultural sector in China.

In view of the above conclusions， we made several suggestions for the development of agricultural sector. In the first place， the government should improve the process of interest rate liberalization， after that the loaning interest rate would fluctuate according to credit market supply and demand. In the second place， the economic policies should be promulgated for promoting labor surplus transporting from primary industry to secondary and tertiary industries. In the third place， through market forces and policy guidance，it was important to enhance the degree of participation of social capital offering to agricultural enterprises for expanding production and employment.

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F323.9 Document code： A Article lD： 1006-8104（2015）-04-0069-06

Received 6 July 2015

Sun Zhuo （1982-）， female， Ph. D， engaged in the research of applied economics. E-mail: sunzhuo216@163.com