Empowering Green Transformation: The Strategic Nexus of Innovation, Regulation, and Sustainability in Chinese SMEs

Growing pressure for sustainability has intensified the need for small- and medium-sized enterprises (SMEs) to adopt environmental innovation while maintaining competitive performance. This study examines how green innovation strategy, environmental regulations, and green absorptive capacity jointly shape the sustainable performance of Chinese manufacturing SMEs. Drawing on Resource-Based View, Institutional Theory, and Dynamic Capability Theory, we develop and empirically test a model that positions green innovation as a mediating mechanism linking strategic intent and regulatory forces to environmental, social, and economic performance outcomes. Data were collected through a structured survey of 250 SME managers in Jiangsu Province and analyzed using PLS-SEM. Results show that green innovation strategy significantly enhances both green innovation and sustainability performance, and that green innovation partially mediates the effects of both strategy and regulatory pressure on performance. While environmental regulations positively influence green innovation, they do not directly improve sustainability outcomes unless translated into innovation. Furthermore, green absorptive capacity displays a boundary-conditioning role, unexpectedly weakening the strategy–innovation path when knowledge integration exceeds implementation capacity. The findings extend the sustainability-oriented innovation literature by clarifying the indirect nature of regulation–performance linkages and revealing conditions under which absorptive capability accelerates or impedes green transformation. The study offers practical guidance for policymakers seeking to design innovation-enabling regulatory frameworks and for SMEs aiming to balance capability development with strategic focus to advance sustainability transitions.