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

Round 1

Reviewer 1 Report

Comments and Suggestions for Authors

I congratulate the authors for preparing an interesting manuscript. Without undermining the high quality of the presented paper, I believe that the authors should address two issues:

1. Can the specificity of the Chinese economy (which, on the one hand, remains largely a centrally controlled economy, with widespread elements of the free market) affect the obtained research results?

2. Why does the research period end in 2016? The authors should explain to the reader where this research intention comes from. If they do not do this, the research results presented in the paper at the time of publication in 2025 may seem somewhat "outdated".

Author Response

Dear editor and reviewers,

We are truly grateful to yours and reviewers’ critical comments and thoughtful suggestions for our manuscript entitled “The Impact of Environmental Regulation on the Growth of Small and Micro Enterprises: Insights from China?” (ID:sustainability-3381536). Based on these comments and suggestions, we have made careful modifications on our manuscript. The changes based on reviewers’ suggestions are marked in red. We hope the revised manuscript will meet your journal’s standard. On behalf of all the authors of this article, I would like to express my gratitude to the three reviewers for their suggestions, which have not only improved our article but also broadened and deepened our research. I will answer each reviewer's questions and comments one by one.

Sincerely yours,

Yufen Zhong

Fujian Agriculture and Forestry University

Comments and Suggestions for Author

Comments 1. Can the specificity of the Chinese economy (which, on the one hand, remains largely a centrally controlled economy, with widespread elements of the free market) affect the obtained research results?

Reply: Thank you for pointing out the specificity of China's economy. As you mentioned, the dual characteristics of centralization and market economy indeed have a profound impact on the implementation of environmental regulations and their effects on small and micro enterprises. We fully agree with your view that formulating differentiated policy support is crucial, especially given the variations in implementation across different regions and types of enterprises. Therefore, we will add this perspective in the discussion section, proposing that differentiated policies and support measures can reduce the burden on small and micro enterprises in responding to environmental regulations, while also encouraging green innovation and sustainable development. We hope this addition will better reflect the diversity of China's economy and provide insights for relevant policy-making.

L878-892: Moreover, due to the specificity of China's economy, the impact of environmental regulations on small and micro enterprises varies across regions and market mechanisms. In the eastern regions, where the economy is more developed and enterprises have stronger innovation capabilities, environmental regulations have played a positive role in promoting green technology innovation. However, in the central and western regions, where resources and technology are more limited, environmental regulations may increase the burden on enterprises and restrict their growth. Therefore, it is recommended to formulate differentiated environmental policies that provide tailored support measures for different regions. For example, reducing certain environmental requirements and offering technological and financial support in the central and western regions, while promoting stricter environmental standards in the eastern regions to encourage innovation. At the same time, the government should encourage green innovation by reducing compliance costs through policies such as tax incentives and green funds, enhancing enterprises' green production capabilities, and fostering sustainable development.

Comments 2. Why does the research period end in 2016? The authors should explain to the reader where this research intention comes from. If they do not do this, the research results presented in the paper at the time of publication in 2025 may seem somewhat "outdated".

Reply: The choice of the research period directly affects the timeliness of the conclusions, and your reminder is very important. The research period was set to end in 2016 for the following reasons: Firstly, data availability was a key limitation. The core data source used in this study, the "National Tax Survey Database," had its latest publicly available version up until 2016. After 2017, due to adjustments in statistical criteria, relevant data have not been fully released. Secondly, 2016 marked the beginning of China’s "13th Five-Year Plan," while after 2017, China began implementing the "Pollution Prevention and Control Action Plan" and normalized central environmental inspections. The intensity of environmental policies underwent significant changes during this period. In order to avoid the interference of policy shifts on long-term trend analysis, we chose the period from 2007 to 2016 to ensure that the intensity of environmental regulations remained relatively stable within this timeframe. Although the research data does not cover recent changes, the 10-year panel data is sufficient to reveal the long-term dynamic relationship between environmental regulations and the growth of small and micro enterprises. This explanation has been added to the article.

L425-435: The decision to end the research period in 2016 was primarily driven by two factors: first, the latest publicly available data from the "National Tax Survey Database" extends only to 2016, as data for 2017 and beyond has not yet been fully released due to adjustments in statistical methods. Second, 2016 marked the start of China's "13th Five-Year Plan," and it represented a relatively stable period for environmental regulations before significant shifts occurred in 2017 with the launch of the "Pollution Prevention and Control Action Plan" and the regularization of central government environmental inspections. Ending the period in 2016 ensures that the study captures a more stable and comparable set of environmental regulations, avoiding the potential confounding effects of more recent regulatory changes.

Reviewer 2 Report

Comments and Suggestions for Authors

The issues discussed in the article remain relevant. The structure of the article is appropriate. However, a significant weakness of the article lies in the timeframe of the research, which spans from 2008 to 2016. The authors state that “this study examines the effects of environmental regulation on SME growth during the 2007–2016 period.” They further explain that "The primary data on SMEs is sourced from the 'National Tax Survey Database,' jointly collected by the Ministry of Finance and the State Taxation Administration of China. The latest update, extending to 2016...”

Since 2016, significant changes have occurred in the approach to environmental regulations, natural resource protection, and related policymaking. Consequently, providing recommendations for the year 2025 based on this dataset is highly questionable.

The authors did not explicitly articulate the objective of the article—this applies to the introduction and abstract sections—nor did they clearly define the research problem, hypotheses. Furthermore, the conclusion section lacks a discussion of the study's limitations.

In the theoretical section, the absence of references to well-known publications, influential authors, or prominent researchers addressing the discussed issues is evident. This section is notably underdeveloped and lacks depth.

Author Response

Dear editor and reviewers,

Sincerely yours,

Yufen Zhong

Fujian Agriculture and Forestry University

Comments and Suggestions for Author

Comments 1. The issues discussed in the article remain relevant. The structure of the article is appropriate. However, a significant weakness of the article lies in the timeframe of the research, which spans from 2008 to 2016. The authors state that “this study examines the effects of environmental regulation on SME growth during the 2007–2016 period.” They further explain that "The primary data on SMEs is sourced from the 'National Tax Survey Database,' jointly collected by the Ministry of Finance and the State Taxation Administration of China. The latest update, extending to 2016...”

Reply: Thank you for your positive feedback on the article structure and discussion content, as well as for your valuable comments regarding the research period. We fully understand your concerns about the potential timeliness issues arising from the research period ending in 2016 and have provided a detailed explanation in the manuscript. Specifically, we chose the period from 2007 to 2016 because the latest available data from the "National Tax Survey Database" is up to 2016, and data after 2017 has not been fully disclosed. Additionally, 2016 marked the beginning of China's "13th Five-Year Plan," during which environmental policies were relatively stable, making it a suitable end year for the study to ensure the accuracy and stability of the research results. We have elaborated on this in the manuscript and plan to expand the data range in future research to verify the robustness of the conclusions.

Comments 2. Since 2016, significant changes have occurred in the approach to environmental regulations, natural resource protection, and related policymaking. Consequently, providing recommendations for the year 2025 based on this dataset is highly questionable.

Reply: Indeed, after 2016, there have been significant changes in environmental regulations, natural resource protection, and related policies, which makes providing recommendations for 2025 based on this dataset somewhat challenging. We would like to explain the reasons for choosing 2016 as the cutoff year for the study.The core data source used in this study, the "National Tax Survey Database," has its latest publicly available data up until 2016. Data from 2017 and beyond has not been fully released due to adjustments in statistical standards and the data publication cycle. To ensure the integrity and consistency of the data, we chose 2016 as the end year for the study period. 2016 marked the start of China’s "13th Five-Year Plan," which represented a relatively stable phase in terms of policy, with consistent implementation of environmental regulations. In order to avoid the impact of policy changes after 2017 on the long-term trend analysis, we decided to set the study period from 2007 to 2016 to ensure the continuity of the data and the stability of the research results.

Comments 3. The authors did not explicitly articulate the objective of the article—this applies to the introduction and abstract sections—nor did they clearly define the research problem, hypotheses. Furthermore, the conclusion section lacks a discussion of the study's limitations.

Reply: We have made appropriate revisions in the updated version in response to your comments on the abstract, research methods, and discussion sections. Specifically, we have clearly stated the research objectives, problems, and hypotheses in the abstract to ensure that readers can easily understand the core direction of the study. Additionally, we have added the research objectives and theoretical framework in the introduction to further clarify the significance and purpose of the study. In the discussion section, we have included a discussion of the study's limitations, particularly concerning the timeliness of the data and the potential impact of unobserved variables on the results. We hope these revisions better address your feedback and enhance the paper’s completeness and clarity.

L11-22: This study aims to investigate how city-level environmental regulations in China affect the growth of small and micro enterprises (SMEs), 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. By applying a dynamic panel model and an entropy-weighted assessment, the result showed that (1) stricter environmental regulations significantly impede SME 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 SME 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.

L167-187: Grounded in neoclassical economics, this theory posits that environmental regulations impose direct costs (e.g., pollution abatement investments) and indirect costs (e.g., diverted R&D funds), reducing firms' profitability and competitiveness—particularly for SMEs with limited resources [46]. This section conducts a theoretical analysis of the relationship between environmental regulation and enterprise growth, and explores the mechanism of regulation through indirect paths such as technological innovation and policy support.

3.1.1 Direct Impact of Environmental Regulation on SME Growth

Prior studies predominantly apply these theories to large firms [47], leaving SMEs’ responses underexplored. Two critical gaps emerge: Scale Sensitivity: SMEs’ thin profit margins amplify compliance costs, but their agility may facilitate faster innovation adoption. Policy Reliance: Unlike large firms, SMEs disproportionately depend on government support to absorb regulatory shocks[48], suggesting that policy buffersmay play a larger mediating role. Based on the theoretical framework, we formulate the following hypotheses:

H1a: Environmental regulation has a significant negative influence on SME growth.

H1b: Environmental regulation has a significant positive influence on SME growth.

H2: Environmental regulation mitigates the negative influence on SME growth by increasing investment in technological innovation.

H3: Environmental regulation mitigates the negative influence on SME growth through increased policy support.

Comments 4. In the theoretical section, the absence of references to well-known publications, influential authors, or prominent researchers addressing the discussed issues is evident. This section is notably underdeveloped and lacks depth.

Reply: We have made revisions to the theoretical section based on your suggestions, especially in terms of literature citation. Specifically, we have added classical economic theories and relevant research by scholars to further enrich the theoretical framework. For example, in the theoretical analysis section, we incorporated the neoclassical economic theory, emphasizing the direct costs of environmental regulations (such as investment in pollution control) and indirect costs (such as the diversion of funds from research and development). We also discussed how these costs reduce firms' profitability and competitiveness, especially for small and micro-enterprises with limited resources. Additionally, we referenced the empirical research by Rubashkina et al. on the Porter Hypothesis, highlighting how environmental regulation can influence the competitiveness of large firms. Through these literature additions, we further clarified the relationship between environmental regulations and the growth of small and micro-enterprises, and explored the mechanisms through indirect pathways, such as technological innovation and policy support.

L167-170: Grounded in neoclassical economics, this theory posits that environmental regulations impose direct costs (e.g., pollution abatement investments) and indirect costs (e.g., diverted R&D funds), reducing firms' profitability and competitiveness—particularly for SMEs with limited resources [46].

L175-181:Prior studies predominantly apply these theories to large firms [47], leaving SMEs’ responses underexplored. Two critical gaps emerge: Scale Sensitivity: SMEs’ thin profit margins amplify compliance costs, but their agility may facilitate faster innovation adoption . Policy Reliance: Unlike large firms, SMEs disproportionately depend on government support to absorb regulatory shocks[48), suggesting that policy buffersmay play a larger mediating role. Based on the theoretical framework, we formulate the following hypotheses:

Reviewer 3 Report

Comments and Suggestions for Authors

(1) How can the study address the potential endogeneity of policy support? Would instrumental variable methods or other approaches be appropriate?

(2) Are there any other potential mechanisms through which environmental regulations could affect SME growth that the authors considered but did not include in the analysis? If so, why were these mechanisms omitted?

(3) Would the findings be affected if the study were conducted in a different country with a different economic structure and regulatory environment?

Comments on the Quality of English Language

While the paper is well-written and generally clear, there are a few areas where the language could be further refined for clarity and precision. Here are some suggestions:

1.Sentence Structure: Some sentences are quite long and complex, making them difficult to follow. Consider breaking down long sentences into shorter ones or using punctuation to clarify the structure. For example:

"According to the Porter Hypothesis, these kinds of rules can spur innovation by generating "compensatory effects" and "first-mover advantages" that lower costs and boost competitiveness, hence fostering development."

"This finding is consistent with Hidayati’s (2011) conclusion that investment in innovation acts as a signal, with expanding such investment enhancing SMEs' future growth prospects."

2.Word Choice: In some cases, more precise or specific words could be used to convey the intended meaning. For example:

"Impact" is used frequently throughout the paper, but other words like "effect," "influence," or "consequence" might be more appropriate depending on the context.

"Process" could be replaced with "production" or "operation" when referring specifically to the process of business activities.

3.Grammar and Syntax: There are a few minor grammatical errors and awkward phrases that could be corrected to improve the overall flow of the text. For example:

"The sample's SMEs' average operating cost ratio surpassed 90% between 2008 and 2016, indicating severe cost constraints."

"However, the cycle of innovation and technical advancement is lengthy, particularly for small and medium-sized businesses."

4.Technical Terms: Some technical terms could be defined or explained for readers who may not be familiar with the field. For example:

"Porter Hypothesis"

"Compliance Cost Theory"

"Dynamic Capability Theory"

Overall, the English in the paper is sufficient for understanding the research, but further improvement would enhance the clarity and professionalism of the writing.

Author Response

Dear editor and reviewers,

Sincerely yours,

Yufen Zhong

Fujian Agriculture and Forestry University

Comments and Suggestions for Author

Comments 1. How can the study address the potential endogeneity of policy support? Would instrumental variable methods or other approaches be appropriate?

Reply: We are grateful for the expert's valuable insights. The objective of this study is to assess the influence of environmental regulations on the growth of small and medium-sized enterprises (SMEs) in China. We employed the System Generalized Method of Moments (System GMM) to mitigate potential endogeneity issues concerning policy variables, taking into account the dynamic interactions among the model's variables. Lagged terms served as instrumental variables, and the possibility of over-identification was ruled out using the Sargan test (p>0.05). Additionally, we performed robustness checks on the potential endogeneity of policy support variables, thereby addressing concerns about policy endogeneity.

L115-118: This study addresses this issue by adopting the System Generalized Method of Moments (System GMM) model, which can deal with potential endogeneity problems and provides more reliable estimates of the relationship between environmental regulation and SME growth [30].

L250-252: Compensatory policies—such as tax incentives, fiscal subsidies, and loan sup-port—accompanying environmental regulations provide SMEs with greater access to external resources, fueling growth.

Comments 2. Are there any other potential mechanisms through which environmental regulations could affect SME growth that the authors considered but did not include in the analysis? If so, why were these mechanisms omitted?

Reply: Thank you for the expert's opinion. This study focuses on data at the urban level in China, and the conclusions are influenced by China's unique institutional environment, such as central local policy implementation mechanisms and regional industrial upgrading paths. The differences in economic structure and regulatory systems among different countries may lead to heterogeneity in the results, and the universality of the results has been further elucidated in the sixth section at the end.

This study concentrates on technological innovation and policy support, assessing the validity of the "compliance cost-effectiveness" and the "Porter hypothesis" regarding environmental regulations, and elucidating the mediating roles of policy support and technological innovation. In subsequent sections, we examine the direct effects of environmental regulations on corporate growth and delve into the roles of intermediary mechanisms and external factors in this process. Concurrently, informed by expert insights, we have incorporated pathways, such as shifts in consumer demand and environmental premiums, that influence the growth of small and medium-sized enterprises (SMEs). However, due to constraints in micro-data availability, these mechanisms have not been empirically tested. The author intends to further investigate these potential mechanisms in forthcoming research by leveraging enterprise survey data.

L305-307: After identifying the total effect of environmental regulation on SME growth, a mediation model is introduced to further explore the mechanisms through which environmental regulation impacts SME growth.

L159-165:To systematically explore the impact mechanism of environmental regulation on the growth of small and micro enterprises, this chapter will start from two aspects: theoretical analysis and hypothesis derivation. In the subsequent sections, we first discuss the direct impact of environmental regulation on enterprise growth, and then further explore how potential mediating mechanisms and external factors play a role in this process. Through these analyses, this study proposes a series of hypotheses to lay the foundation for the empirical research.

L706-715: First, in the western region, abundant renewable resources enable environmental regulation to promote green innovation, such as by enhancing the environmental performance of their products, small and medium-sized enterprises can set higher prices for their products, known as environmental premiums. Consumers are increasingly valuing the sustainability of products, so they may be willing to pay extra for envi-ronmentally friendly products, thereby improving resource utilization efficiency and promoting the growth of small and medium-sized enterprises (SMEs).

Comments 3. Would the findings be affected if the study were conducted in a different country with a different economic structure and regulatory environment?

Reply: We appreciate the expert's feedback. This research centers on urban-level data in China, with findings shaped by the nation's distinct institutional context, including central-local policy execution frameworks and regional industrial advancement trajectories. Variations in economic structures and regulatory regimes across countries may induce heterogeneity in outcomes, a point further expounded upon in Section 6.1.

L838-846: The study's conclusions are predicated on China's distinctive policy framework and regional economic structure. Therefore, the generalizability of these findings necessitates cautious assessment in relation to the broader national context. For instance, the decentralized environmental regulatory models prevalent in federal systems or variations in subsidy levels across firms within high-welfare economies could potentially alter the regulatory response mechanisms of small and medium-sized enterprises (SMEs). Subsequent research might engage in cross-jurisdictional comparisons to assess how economic systems and the intensity of regulation influence the outcomes.

Comments 4. Sentence Structure: Some sentences are quite long and complex, making them difficult to follow. Consider breaking down long sentences into shorter ones or using punctuation to clarify the structure. For example:

"This finding is consistent with Hidayati’s (2011) conclusion that investment in innovation acts as a signal, with expanding such investment enhancing SMEs' future growth prospects."

Reply: We fully understand that long sentences can make it difficult for readers to follow the text smoothly. Therefore, in the revised version, we have split and simplified long sentences and used appropriate punctuation to clearly express the sentence structure.

L549-557: According to the Porter hypothesis, environmental regulations can foster business innovation and enhance an organization's long-term competitiveness, particularly in terms of technological adaptability. However, the innovation process requires time. For small and medium-sized enterprises (SMEs) with limited funding and innovation capacity, one possible explanation for the delayed negative effects is the extended time required for research, development, and the implementation of new technologies. The costs associated with compliance to environmental regulations accumulate over time, and before innovation yields substantial benefits, these costs can severely hinder business growth, particularly after a two-year period.

L795-802: Moreover, the two-year lag effect suggests that businesses require time to adapt to environmental regulations, which is consistent with the theory of dynamic capabilities. This theory posits that businesses need time to reorganize their assets and competencies to respond to external changes. The innovation and technological advancement cycle is particularly long for small and medium-sized enterprises (SMEs). Therefore, during the initial stages of implementing environmental regulations, businesses are more likely to rely on temporary coping mechanisms until regulatory costs accumulate and significantly hinder their growth potential.

Comments 5. Word Choice: In some cases, more precise or specific words could be used to convey the intended meaning. For example:

"Impact" is used frequently throughout the paper, but other words like "effect," "influence," or "consequence" might be more appropriate depending on the context.

"Process" could be replaced with "production" or "operation" when referring specifically to the process of business activities.

Reply: We understand your concern regarding the use of vocabulary, and have made adjustments to some terms in the revised version to ensure greater precision and appropriateness. For example, in response to the frequent use of the word "impact," we have replaced it with "effect," "influence," or "consequence" depending on the specific context, in order to better convey the intended meaning in the study. Similarly, for the term "process," we have made modifications, replacing it with "production" or "operation" based on the context to accurately describe the specific activities of businesses. Please refer to the highlighted sections in the article for details.

Comments 6. Grammar and Syntax: There are a few minor grammatical errors and awkward phrases that could be corrected to improve the overall flow of the text. For example:

"The sample's SMEs' average operating cost ratio surpassed 90% between 2008 and 2016, indicating severe cost constraints."

"However, the cycle of innovation and technical advancement is lengthy, particularly for small and medium-sized businesses."

Reply: We have carefully reviewed the relevant sections of the paper and made corrections to some minor grammatical errors and areas where the expression was not smooth enough.

L41-55: A key factor influencing the expansion of small and medium-sized enterprises (SMEs) is environmental regulation. According to the Porter Hypothesis, such regulations can stimulate innovation by generating "compensatory effects" and "first-mover advantages" that reduce costs and enhance competitiveness, thereby fostering growth [4]. In contrast, the Compliance Cost Theory argues that these regulations increase manufacturing costs, reduce research and development (R&D) investments, lower profits, and ultimately undermine competitiveness [5-6]. SMEs are particularly vulnerable, as they already face challenges such as high costs, limited scalability, and financing difficulties. Between 2008 and 2016, the average operating cost ratio of SMEs in the sample exceeded 90%, highlighting significant cost pressures. As a result, many SMEs may encounter financial strain or even insolvency due to environmental policies that exacerbate these constraints [7]. Therefore, it is essential to examine how regional environmental regulations impact SME growth in order to inform policies aimed at alleviating these challenges and promoting sustainable development [8-9].

L796-802: Moreover, the two-year lag effect suggests that businesses require time to adapt to environmental regulations, which is consistent with the theory of dynamic capabilities. This theory posits that businesses need time to reorganize their assets and competencies to respond to external changes. The innovation and technological advancement cycle is particularly long for small and medium-sized enterprises (SMEs). Therefore, during the initial stages of implementing environmental regulations, businesses are more likely to rely on temporary coping mechanisms until regulatory costs accumulate and significantly hinder their growth potential.

Comments 7. Technical Terms: Some technical terms could be defined or explained for readers who may not be familiar with the field. For example:

"Porter Hypothesis"

"Compliance Cost Theory"

"Dynamic Capability Theory"

Reply: Some of the technical terms used in the paper may be unfamiliar to certain readers. Therefore, we have defined and explained these terms in the revised version to ensure that the content is clearer and more accessible.

L144-146: Porter hypothesis (Stringent environmental regulations can drive innovation in firms, thereby enhancing their competitiveness.)"[37-38].

L782-785: The Compliance Cost Theory posits that environmental regulations increase compliance costs for businesses, with small and micro enterprises facing greater financial strain, which is supported by these findings.

L507-511:life cycle theory (Behavior and decisions change over time as individuals or businesses progress through different stages of development) and dynamic capability theory (Firms maintain competitiveness by continuously adapting and innovating their resources and capabilities to respond to external environmental changes).

Author Response File: Author Response.doc

Round 2

Reviewer 2 Report

Comments and Suggestions for Authors

Accept in present form

Author Response

Dear editor and reviewers,

Thank you for your message and the positive feedback regarding the acceptance of our manuscript titled “The Impact of Environmental Regulation on the Growth of Small and Micro Enterprises: Insights from China?” (ID: sustainability-3381536) in its present form. We sincerely appreciate the thoughtful suggestions provided by the reviewers and your continued guidance throughout the process. We have carefully re-examined the manuscript and made revisions to further improve its clarity and quality. All the changes have been marked in red for easy identification. Once again, we would like to express our gratitude to you and the reviewers for your valuable comments, which have undoubtedly enhanced the quality of the manuscript.

Sincerely yours,

Yufen Zhong

Fujian Agriculture and Forestry University

Reviewer 3 Report

Comments and Suggestions for Authors

The research design, questions, hypotheses, and methods are clearly stated, which is commendable. However, consider adding a brief summary or overview at the beginning of the methods section to enhance readability and provide a quick snapshot for readers.
The arguments and discussion of findings are coherent, balanced, and compelling. To further strengthen this, ensure that counterarguments or alternative interpretations are adequately addressed and refuted where necessary.
The results are clearly presented. To improve clarity, consider using additional visual aids such as charts or graphs where appropriate. This can help in conveying complex data more effectively.
The article is adequately referenced, with relevant and appropriate sources. To enhance the depth of the literature review, consider including a few more recent studies or seminal works that might have been omitted.
The conclusions are thoroughly supported by the results and referenced literature. To further bolster these conclusions, you might want to briefly discuss the implications of your findings for future research or practice.
No major ethical concerns were identified. However, ensure that all participant consent and data privacy aspects are explicitly mentioned to reinforce the ethical integrity of the study.
Proofread the manuscript for any grammatical or typographical errors to ensure polished presentation. Consider adding a section on the limitations of the study and how they might affect the generalizability of the findings. Ensure that the abstract accurately and concisely summarizes the key points of the study.

Author Response

Dear editor and reviewers,

Sincerely yours,

Yufen Zhong

Fujian Agriculture and Forestry University

Comments and Suggestions for Author

Comments 1. The research design, questions, hypotheses, and methods are clearly stated, which is commendable. However, consider adding a brief summary or overview at the beginning of the methods section to enhance readability and provide a quick snapshot for readers.

Reply: Thank you for your kind feedback. We also appreciate your valuable suggestion to add a brief summary at the beginning of the methods section. In response, we have included a concise overview that introduces the dynamic modeling approach, including the use of the System Generalized Method of Moments (System GMM) to address the persistent effects of environmental regulations, mitigate potential endogeneity concerns, and overcome the limitations of traditional panel models. We also introduced a mediation model to explore the indirect pathways through which factors like technological innovation and policy support mediate the relationship between environmental regulation and SME growth. We hope this improves the readability and provides a quick overview for the readers.

L271-280: This section details the research design and methodology employed to assess the impact of environmental regulation on the growth of SMEs. The study adopts a dynamic modeling approach, utilizing the System Generalized Method of Moments (System GMM) to account for the persistent effects of environmental regulations, mitigate potential endogeneity concerns, and address the limitations of traditional panel models. In addition, a mediation model is introduced to investigate the indirect pathways through which factors such as technological innovation and policy support mediate the relationship between environmental regulation and SME growth. This section also provides an overview of the model construction and the testing procedures applied in the analysis.

Comments 2. The arguments and discussion of findings are coherent, balanced, and compelling. To further strengthen this, ensure that counterarguments or alternative interpretations are adequately addressed and refuted where necessary.

Reply: Thank you for your positive feedback on the coherence and balance of our arguments. We also appreciate your suggestion to address counterarguments. In response, we have introduced the Porter hypothesis, acknowledging its applicability to larger firms but highlighting how, in the short term, it may not apply to SMEs due to their limited resources. We have also discussed how regional variations in policy implementation can lead to different impacts on SMEs, adding depth to our analysis. These additions help to address and refute the potential counterargument regarding the overall benefits of environmental regulations for SMEs.

L538-547: One potential counterargument is that environmental regulations might spur innovation and long-term growth by forcing SMEs to adapt and develop more sustainable practices. This view aligns with the Porter hypothesis, which posits that strict environmental regulations can drive firms to innovate, thus enhancing their competitive advantage. While this is indeed a valid perspective, our findings suggest that for SMEs, particularly those with limited resources, the short-term compliance costs may overwhelm their ability to innovate in the early stages. This temporary setback could hinder their growth prospects, especially when faced with substantial initial expenditures on compliance (e.g., clean production facilities, pollution control equipment) before the benefits of innovation are realized.

L556-563: This raises an important question: Are these delays merely transient adjustments that, once SMEs have fully adapted, will ultimately pave the way for enhanced growth? While it is possible that the long-term impact of environmental regulations could lead to greater innovation and efficiency, our data show that SMEs, due to their limited financial, technical, and managerial resources, face significant challenges in adapting quickly. These firms may resort to short-term strategies such as reducing non-essential spending or postponing investments in technology, which undermines their growth potential in the early phases of policy enforcement.

L564-571: Moreover, the variation in the impact of environmental regulations across different regions further complicates the narrative. Geographical differences in policy implementation—with some regions initially offering leniency and others more stringent enforcement—may cause disparities in how regulations affect SMEs. In some cases, the delay in policy enforcement may mitigate the negative effects in the short term, while in others, a gradual tightening of regulatory measures may intensify the negative impact more rapidly. This heterogeneity warrants further exploration, as it suggests that not all SMEs face the same challenges when it comes to environmental compliance.

L572-579:Furthermore, while the Porter hypothesis advocates that stricter environmental regulations can catalyze innovation, this effect is often more pronounced in larger firms that possess greater financial and technical resources. These firms can better absorb the compliance costs, investing in research and development to innovate, thus leveraging environmental regulations as a driver of growth. On the contrary, SMEs with more limited resources are less equipped to turn regulatory compliance into an innovation opportunity in the short term. As a result, the innovation benefit, if any, may not materialize in the immediate period after regulatory changes are enforced.

Comments 3. The results are clearly presented. To improve clarity, consider using additional visual aids such as charts or graphs where appropriate. This can help in conveying complex data more effectively.

Reply: Thank you for your positive feedback on the presentation of our research results. We also appreciate your valuable suggestion to use additional visual aids, such as charts or graphs, to improve clarity. In response, we have added Figure 2, which visually represents the relationship between environmental regulation and SME growth over time. This bar chart or line graph clearly illustrates the trends from 2008 to 2016, showing the gradual increase in regulatory intensity and the slight decline in SME growth. This visual aid helps to convey the key data more effectively and allows readers to quickly grasp the main findings of the paper.

L496-501: As shown in Figure 2, the relationship between SMEs' growth and environmental regulation intensity is visually represeted. This figure illustrates the changes in the average values of both variables from 2008 to 2016, providing a clearer view of the gradual increase in regulatory measures and the slight decline in SMEs' growth. The trend shown in Figure 2 supports the earlier statistical findings, suggesting that as regulatory measures intensify, SMEs’ growth appears to slow down.

Comments 4. The article is adequately referenced, with relevant and appropriate sources. To enhance the depth of the literature review, consider including a few more recent studies or seminal works that might have been omitted.

Reply: Thank you for your positive feedback on the references used in our article, and for recognizing the relevance and appropriateness of the sources. We also appreciate your suggestion to include some more recent studies or seminal works that may have been omitted. In response, we have incorporated the following recent studies and seminal works into the manuscript.

L1047-1055: [54] Kong, Z., Du,J., Kong,Y., et al.(2024). Financial development, environmental regulation, and corporate green technology innovation: Evidence from Chinese listed companies.Finance Research Letters,2024,62(PA):105122-.

[55] Chen, Q., Li,M.(2024). Environmental regulatory system reform and corporate ESG ratings: Evidence from China.Economic Modelling, 135106710.

[56] Li,N., Zhang,H., Zhang,X., et al. (2025) Does Market-Based Environmental Regulatory Policy Improve Corporate Environmental Performance? Evidence from Carbon Emission Trading in China. Sustainability, 17(2): 623-623.

[57] Du,Q., Li,Z., Du,M., et al.(2025) Corrigendum to ”Government venture capital and innovation performance in alternative energy production: The moderating role of environmental regulation and capital market activity” [Energy Economics Volume 129,143108236-108236.

Comments 5. The conclusions are thoroughly supported by the results and referenced literature. To further bolster these conclusions, you might want to briefly discuss the implications of your findings for future research or practice.

Reply: Thank you for your positive feedback on the conclusions of our study and for your valuable suggestion to briefly discuss the implications of our findings for future research or practice. In response, we have added a section in 6.1 Research Conclusions discussing the implications for future research and practice, emphasizing the importance of cross-jurisdictional comparisons and the impact of post-2016 policy shifts. Additionally, in the concluding part ("Implications for Future Research and Practice"), we have introduced a discussion on the potential impact of unmeasured factors, such as entrepreneurial risk appetite and informal institutional networks, which may mediate responses to environmental regulations, and provided suggestions for future research. We believe these additions strengthen the overall discussion and provide a more comprehensive outlook for future research.

L848-856: Future research could explore cross-jurisdictional comparisons to assess how different economic systems, regulatory models, and the intensity of environmental regulation influence the growth of SMEs. Additionally, considering post-2016 policy shifts such as carbon neutrality targets, future studies should incorporate updated data to assess the evolving impact of these policies. Moreover, factors such as entrepreneurial risk appetite and informal institutional networks may mediate responses to environmental regulations but were not captured in this study. These unmeasured variables could offer a more nuanced understanding of the regulatory effects on SMEs.

L903-913: This study primarily relies on data from 2007 to 2016, which captures long-term mechanisms, but does not account for post-2016 policy shifts, such as carbon neutrality targets. Therefore, future updates are necessary to examine the impact of these new policies. Additionally, factors such as entrepreneurial risk appetite and informal institutional networks (e.g., guanxi) may mediate responses to environmental regulations but remain unmeasured in this study. The findings may also have limited external validity, as they may not be fully applicable to economies with decentralized environmental governance, such as EU member states. Future research could address these limitations by incorporating multi-country datasets and digital trace data, such as ESG disclosure texts, to provide a more comprehensive understanding of the regulatory effects across diverse contexts.

Comments 6. No major ethical concerns were identified. However, ensure that all participant consent and data privacy aspects are explicitly mentioned to reinforce the ethical integrity of the study.

Reply:Thank you for your valuable feedback. The data used in this study come from publicly available databases, which are collected and released by national statistical authorities. Given their official nature, these data are highly objective and authoritative, and they do not involve individual-level sensitive information or ethical concerns. Therefore, no additional ethical review is required. However, if further clarification on ethical compliance is necessary, we are happy to provide additional details in accordance with the journal’s requirements.

Comments 7. Proofread the manuscript for any grammatical or typographical errors to ensure polished presentation.

Reply: Thank you for your valuable suggestion to proofread the manuscript for any grammatical or typographical errors. We have thoroughly reviewed the manuscript and identified areas where consistency and clarity could be improved. Specifically, we made the following corrections.

L57-58: Original: Few studies have examined the influence of environmental rules on SME growth;

Corrected:Few studies have examined the influence of environmental regulations on SME growth;

L79-82: Original: It provides useful information for policy formulation by evaluating whether SMEs in areas with more stringent environmental rules receive greater policy support to lessen external shocks.

Corrected: It provides useful information for policy formulation by evaluating whether SMEs in areas with more stringent environmental regulations receive greater policy support to lessen external shocks.

L789-790: Original: The expansion of businesses is significantly hampered by environmental rules .

Corrected:The expansion of businesses is significantly hampered by environmental regulations.

L34-36: Original:During the implementation of China's "13th Five-Year Plan," more than 90% of newly registered tax-related companies were SMEs, totaling approximately 52 million businesses and making a substantial economic contribution.

Corrected: During the implementation of China's "13th Five-Year Plan," more than 90% of newly registered tax-related companies were SMEs, totaling approximately 52 million businesses and contributing significantly to the economy.

L46-49: Original: In contrast, the Compliance Cost Theory argues that these regulations increase manufacturing costs, reduce research and development (R&D) investments, lower profits, and ultimately undermine competitiveness.

Corrected: In contrast, the Compliance Cost Theory argues that such regulations increase manufacturing costs, reduce research and development (R&D) investments, lower profits, and ultimately undermine competitiveness.

Comments 8. Consider adding a section on the limitations of the study and how they might affect the generalizability of the findings. Ensure that the abstract accurately and concisely summarizes the key points of the study.

Reply: Thank you for your valuable suggestion to ensure that the abstract accurately and concisely summarizes the key points of the study. In response, we have revised the abstract to provide a brief overview of the main findings and limitations of the study, specifically noting that the study is limited by its focus on data from 2007 to 2016 and does not account for recent policy shifts. Additionally, we acknowledge that the findings may have limited generalizability to economies with decentralized environmental governance systems.

L25-27: 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.

Author Response File: Author Response.pdf