The Impact of Environmental Regulation on the Growth of Small and Micro Enterprises: Insights from China

Small and micro enterprises (SMEs) make important contributions to economic development, innovation, and employment in every country. The increasingly strict environmental regulations have become a global trend, but the empirical literature that evaluates the impacts of environmental regulations on the SMEs’ growth based on their observational data is extremely rare. This study aims to investigate how city-level environmental regulations in China affect the SMEs’ growth, with a focus on identifying lag effects, heterogeneous impacts across regions/enterprise types, and the mediating roles of technological innovation and policy support, using unbalanced panel data from 2007 to 2016. Using a dynamic panel model and entropy-weighted assessment, the results show the following: (1) Stricter environmental regulations significantly impede SMEs’ growth, with this effect persisting for up to two years. Robustness tests confirm the stability of these findings. (2) Despite the overall negative impact, our analysis reveals that environmental regulations can stimulate SMEs’ growth by promoting technological innovation and increasing policy support. (3) Heterogeneity analysis shows that the regulatory effects vary by region, ownership structure, and tax status, with the most adverse impacts observed in private firms, small-scale taxpayers, and businesses outside the Yangtze River Economic Belt. These findings highlight the need for differentiated regulatory approaches to balance environmental objectives with SMEs’ growth. The study is limited by its focus on data from 2007 to 2016, not considering recent policy shifts, and may have limited generalizability to economies with decentralized environmental governance.