| On the macro viewpoint, investment activity is one of the three driving forces that promote economic development and is an important factor in economic growth, environmental and social development; On the micro level, investment decisions are the starting point for the company’s three major financial decisions. It directly affect financing decisions, profit distribution policy and significantly influence the company’s development, as well as matter company’s daily operations, market value and development prospect. Investment behavior is also the core of production and management, which makes it considerably significant to any enterprise that is seeking increased cashflow and high market value.As one aspect of investment performances, overcapacity has been encumbering the development of China’s economy and its negative effects can be observed from both corporate level and national level--decreased product price and profit at the start that will eventually lead to increased unemployment rate and large amount of bad debts in banks, which disturbs regular economics order and causes political instability.China’s steel, cement and electrolytic aluminum industries’ capacity utilization is below international standards and belong to industries with excess capacity, among which the steel industry is the most serious. It lasts the longest time and is considered as the most typical overcapacity industry. The most prominent consequence resulting from the overcapacity in the steel industry is the serious price dropping. According to Steel Industry Association, the sales profit margin was only7%to8%between2003and2007, less than3%between2008and2011and only0.04%in2012. The worsening overcapacity has forced these firms to compete on oversea markets therefore increased China’s trade surplus. The country’s disadvantaged trade partners like United States and South Korea had to seek legitimate approach to protect their own enterprises under this conflict of interest. Therefore, it has an pragmatic significance to take steel industry as the representative of overcapacity to analyze steel enterprises’ investment activity, find the influencing factors and the root causes, as well as to propose recommendations to enhance the value of steel enterprises and narrow the gap with steel enterprises from the developed countries.Since2003, steel industry has shown excess capacity. The policy documents concerning on steel overcapacity have been released successively over the decade, but effect is little. Today, however, the problem has not been completely solved, but becomes worse. Iron and steel companies repeatedly state in their financial statements that companies in this industry have been suffering losses as the industry overall is under performed. What causes the worse overcapacity in steel industry? What is the reason why iron and steel companies while claiming that but continuously invest more capital into production expansion?Bear that in mind, this paper analyses the investment activities of Chongqing Iron&Steel Co., Ltd. since2000, and further introduced the ubiquitous issues in investing behaviors within the iron and steel industry. Then it elaborates the serious consequences and major factors of inefficient investment under overcapacity background and identifies the underlying cause for the unresolved over production in iron and steel industry from the investment point of view.The article includes six chapters:The first chapter is an introduction, including research background, purpose of study, research ideas and the prospective contribution;The second chapter is the literary review, including the review of investment behavior and overcapacity;The third chapter is the theoretical analysis. The theoretical basis are corporate investment theory, agency theory, corporate growth theory and soft budget constraint theory.Chapter four introduces the iron and steel industry, including its status in China’s economy and in the world as well as the overview of overcapacity in China’s steel industry;Chapter five is the case study. It firstly goes through a quantitative calculation of the investment efficiency; then analyzes the investment performance. It introduces inefficient investment’s impact on the enterprises from the perspective of profitability, financial risk, growth, market value, the scale merit and the effect on excess capacity, and then the paper points out two major problems existing in investment behavior of steel industry; Finally, the influence factors of investment is analyzed to explore profitability, debt, government subsidies and the industry policy’s impact on the steel industry.Chapter six is conclusion and suggestions. This paper comes to a conclusion that Chongqing Iron&Steel Co., Ltd was not able to make better investment decisions to mitigate the overcapacity, but chose the unfavorable investment program, which exacerbated the overcapacity and led to poor market of products, decreased profitability, growth and market value and increased financial risk. Meanwhile, the blind expansion didn’t form the scale merit, nut intensified the overcapacity. Government subsidies, government-guaranteed loans and industrial policy are the main reason of over-investment. This situation is rather general in the steel industry, and the excess investment makes the whole steel industry’ supply greater than the demand, which forms the overcapacity. In order to change the situation, the article gives advices separately to the enterprise, the government and the industry policy:firstly, the enterprises should increase R&D input and develop corn products different from their competitors; Moreover, Organizations should also formulate and implement fine management remuneration scheme, to restrain management from over-investment, only focusing on short-term returns without considering the long-term sustainability. Secondly, the government should cancel all forms of public aid and loan guarantees to reduce numbers of companies with excess capability by accepting the natural market order. Thirdly, there should be no such words as "higher-value product development" or "minimum level of annual productivity" to ban companies from making their own strategies. No M&A should be encouraged.This paper contributes from the three points:Firstly, the view of the paper is different from the existing literature. Overcapacity is a macro concept while investment behavior is a microscopic concept. Taking Chongqing Iron&Steel Co., Ltd. as an example, this paper introduces the common problem of overcapacity in the steel industry and analyzes its influencing factors from the specific to the general and from the micro to the macro. Secondly, this paper proposes that industry policy is one of the causes of excess capacity, which is absent in the exiting literature. the article finds that when a new industrial policy is announced, steel enterprises will make massive investments in those production facilities that the policy has advocated in a very short time, which may cause a new and even worse round of overproduction. Industrial policy adjust and control enterprises directly for the development of the industry. It was the industrial policy that caused and accelerated excessive investment and overproduction, which is surely a crucial and imminent issue.At last, the paper proposes suggestions to the enterprises, the government and industry policy in hope to improve the behavior in industries with excessive capacity and promote the healthy development of China’s steel industry. |
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