How does state-owned shares affect double externalities and industrial performance: Evidence from China's exhaustible resources industry

Abstract Excessive entries of business into resource industries can cause allocation inefficiency and externality problems, such as resource depletion and environmental pollution. These problems have been existed in China's resources industry for many years. After opening up to the world, China has even begun to lose some critical strategic resources. Theoretical studies suggest that state-owned shares as an indirect form of entry regulation could help the government reduce costs and control risk. This paper first empirically analyzed the co-integration relationship between double externalities and state-owned shares, using a Seemingly Unrelated Regression based on China's coal, ferrous metal and non-ferrous metal resources panel data for 1999 to 2015. The results showed that state-owned shares significantly reduced the intergenerational (0.760) and environmental externalities (0.265). However, higher state-owned shares might reduce industrial effectiveness; thus, this paper further tested the effect of state-owned shares under different threshold degrees of externality. The results showed that the effect of indirect regulation was the best when it was associated with a medium degree of intergenerational externality and high degree of environmental externality.