1 Introduction

Small and Medium-sized Enterprises (SMEs) serve as the backbone of the Chinese economy, contributing significantly to its vibrancy and resilience (Añón Higón & Bonvin, 2023). The importance of SMEs in China's economic landscape cannot be overstated, as they account for about 97% of all enterprises, 80% of employment, 50% of tax revenue, 60% of GDP, and 70% of innovation achievements in the country (Huang & Mirza, 2022; Liu & He, 2023). With SMEs constituting a substantial portion of the employment base and tax revenue, their sustained growth becomes imperative for ensuring economic stability and prosperity (Ayyagari et al., 2007). However, the economic environment is rife with uncertainties, and Economic Policy Uncertainty (EPU) has emerged as a key factor influencing the sustainable growth of Chinese firms, including SMEs. EPU introduces complexities into the decision-making processes of firms, affecting their strategic choices and overall growth trajectories. Scholars have acknowledged that EPU can have profound effects on various facets of business operations, influencing decisions related to personnel, financing, and other critical aspects of firm functioning (Gu et al., 2021).

The decision-making landscape during periods of EPU becomes critical for firms aiming to navigate uncertainties and achieve sustainable growth. Sustainable growth is defined as the ability of a firm to increase its sales and profits over time, while maintaining its financial health and social responsibility (Schwab et al., 2017). Sustainable growth is important for SMEs, as it reflects their long-term viability and competitiveness in the market. Firms grapple with decisions regarding the composition of their workforce, financing strategies, and overall operational approaches, all of which significantly impact their growth trajectories (Gu et al., 2021). The dichotomy between radical and conservative decision-making strategies further adds complexity to this landscape, with managers adopting varying approaches to navigate EPU phases (Schwab et al., 2017). EPU may also pose risks and opportunities for firms' sustainable growth, depending on how they cope with the uncertain environment.

The impact of EPU on SMEs' sustainable growth is a complex and multifaceted issue, which may vary across different contexts and dimensions. Previous studies have examined the impact of EPU on various aspects of firm performance, such as profitability, productivity, innovation, and corporate social responsibility (CSR), but the results are mixed and inconclusive. some studies find that EPU has a negative impact on firm performance, as it increases the cost of capital, reduces the incentive to invest, and lowers the demand for products and services (e.g., Gulen & Ion, 2016; Pindado et al., 2017). Other studies find that EPU has a positive or insignificant impact on firm performance, as it stimulates the demand for innovation, creates new market opportunities, and enhances the efficiency of resource allocation (e.g., Benlemlih & Yavaş, 2023; Jumah et al., 2023).

Amidst this landscape, the role of green business practices becomes crucial in influencing sustainable growth under EPU conditions. Green practices, aligned with environmental protection and sustainability ideals, have gained prominence in the contemporary business paradigm (Cui et al., 2020). Green business practices refer to the adoption of environmentally friendly and socially responsible practices, such as energy and water conservation, waste reduction and recycling, pollution prevention and control, and community engagement (Cui et al., 2020; Hou et al., 2022; Ng, 2018). Green business practices may have different costs and benefits for SMEs under EPU, as they may entail higher upfront investments, lower operating costs, higher customer satisfaction, and lower regulatory risks. However, their impact under the shadow of EPU is nuanced and can be explored in two dimensions. On one hand, green business practices may strengthen the impact of EPU on sustainable growth by promoting effective resource allocation (Ng, 2018). On the other hand, the implementation of green practices involves significant preparation and implementation costs, potentially altering their impact on sustainable growth (Hou et al., 2022). To comprehend these dynamics, the Real Options Theory provides a robust framework to explain the decision-making processes of firms under uncertainty (Trigeorgis, 1995). In the context of EPU, this theory posits that firms view their decisions as real options, akin to financial options, allowing them to delay, expand, or abandon projects based on evolving uncertainties (Trigeorgis, 1995). Applying this theory, firms may view green business practices as strategic options to enhance sustainable growth, with the flexibility to adjust and adapt in response to changing economic policies and uncertainties. The institutional theory suggests that firms can gain legitimacy and support by conforming to the norms, values, and rules of the institutional environment, such as the political, legal, cultural, and ethical systems (Scott, 1995). EPU may affect the stability and predictability of the institutional environment, especially for SMEs, which may have less influence and protection than larger and listed firms. Green business practices may enhance the legitimacy and support for SMEs, as they may signal their compliance and adaptation to the institutional pressures and expectations.

Moreover, previous studies have largely focused on the impact of EPU on large and listed firms, while ignoring the heterogeneity and specificity of SMEs. SMEs may have different responses and outcomes to EPU, as they have different characteristics, resources, and capabilities than larger and listed firms. For example, SMEs may be more vulnerable and sensitive to EPU, as they have less financial and human capital, lower bargaining power, and higher information asymmetry than larger and listed firms. On the other hand, SMEs may be more flexible and adaptable to EPU, as they have more entrepreneurial spirit, innovation potential, and niche market advantages than larger and listed firms. Therefore, it is important to examine the impact of EPU on SMEs' sustainable growth, and how this impact may vary across different types and stages of SMEs.

China is a large and important emerging market with high levels of EPU and a dynamic private sector. China's EPU index, which is constructed by counting the number of newspaper articles that contain terms related to the economy, policy, and uncertainty in China, has increased significantly since the global financial crisis of 2008, and has reached new peaks in recent years due to the trade war with the US, the COVID-19 pandemic, and the regulatory crackdown on various industries (Baker et al., 2016; Zhou et al., 2022). China's private sector, which consists of mainly small and medium-sized enterprises (SMEs), plays a crucial role in providing employment opportunities, income generation, and market competitiveness, especially in developing regions and emerging industries. However, China's private sector also faces various challenges and uncertainties in its operations, such as limited access to finance, technology, and human resources, as well as fierce competition from state-owned enterprises (SOEs) and foreign firms (Dreyer & Schulz, 2023; Huang & Mirza, 2022; Karadağ, 2016; Temouri et al., 2020).

Therefore, it is of great interest and significance to examine the impact of EPU on corporate sustainable growth among Chinese firms, and how this impact may vary between SMEs and non-SMEs. This paper aims to fill this research gap by using a large and representative sample of 2771 Chinese non-financial A-share firms (including 1674 SMEs and 1097 non-SMEs) from 2010 to 2022, and employing various measures of EPU, sustainable growth, and the role of green business practices in the context of Chinese SMEs. We use a large and representative sample of 2771 Chinese non-financial A-share firms (including 1674 SMEs and 1097 non-SMEs) from 2008 to 2020, and employ various measures of EPU, sustainable growth, and green business practices. This study finds that EPU negatively impacts on the corporate sustainable growth of Chinese non-financial firms where this effect is more pronounced in non-SEMs. However, this negative effect is more influenced by trade policy uncertainties rather than fiscal, monetary and exchange rate policy uncertainties. Moreover, green business practices conducted by Chinese firms show a positive moderating effect on the negative association of EPU on corporate sustainable growth across all the subsample like SMEs and NON-SMEs. Acknowledging the significance of SMEs in the Chinese economy, comprehending the ramifications of EPU on their sustainable growth, and exploring the pivotal role of green business practices become pivotal for informed decision-making by policymakers, business leaders, and scholars.

Our paper contributes to the literature on EPU, sustainable growth, SMEs, and green business practices in several ways. First, we provide empirical evidence on the impact of EPU on SMEs' sustainable growth in China, which is a large and important emerging market with high levels of EPU and a dynamic SME sector. Second, we examine the role of green business practices in moderating the impact of EPU on SMEs' sustainable growth, and how this role may differ across SMEs and non-SMEs. Third, we use a comprehensive and reliable dataset of Chinese SMEs, and employ various measures of EPU, sustainable growth, and green business practices, as well as rigorous econometric methods to address the potential endogeneity issues.

The rest of the paper is organized as follows. Section 2 reviews the relevant literature and develops the hypotheses. Section 3 describes the data, the measurement of variables, and the methodology. Section 4 presents and discusses the results of the regression analysis. Section 5 concludes the paper and provides some suggestions for future research. The references are listed at the end of the paper.

2 Literature review and hypothesis development

2.1 Economic policy uncertainty and corporate sustainable growth

Economic Policy Uncertainty (EPU) denotes the unpredictability of future economic policies, impacting firms' expectations and behaviors related to investment, financing, employment, and innovation (Baker et al., 2016). The implications of EPU for sustainable growth among Chinese firms are complex, with potential risks and opportunities hinging on firms' adeptness in navigating this uncertain environment. Sustainable growth, defined as a firm's ability to increase sales and profits over time while upholding financial health and social responsibility (Higgins, 1977), is paramount for long-term competitiveness. The challenges posed by EPU to corporate decision-making are underscored in various studies, emphasizing its disruptive effects on strategies, investment, and overall sustainable growth (Baker et al., 2016; Bloom et al., 2007).

Firms tend to adopt cautious approaches amid policy ambiguity, influencing their sustainable growth trajectories. Sustainable growth, encompassing economic, social, and environmental dimensions (Schwab et al., 2017), is contingent on how firms navigate the environmental uncertainty induced by EPU. The Real Options theory posits that the perceived risk of EPU affects firms' decision-making, fostering prudence in the face of uncertainty (Knight, 1921). This prudent decision-making process, reducing the likelihood of costly mistakes, contributes to a stable and less radical development path, a prerequisite for sustainable business growth (Schwab et al., 2017). EPU's impact extends to short-term and long-term capital investment, as explained by the Real Options theory (Trigeorgis, 1995). The heightened uncertainty reduces the total number of investment behaviors due to increased risks related to factors like border closures and raw material supply interruptions (Bernanke, 1983; Wang et al., 2014). However, contrasting views suggest that uncertainty may stimulate investment through expected profit margin boosts (Abel, 1983; Abel & Blanchard, 1986; Hartman, 1972). Sustainable growth hinges on firms aligning their investment decisions with their strategies and operating environment analysis (Scholes et al., 2002).

Diverse studies present conflicting perspectives on the relationship between EPU and sustainable growth. While some assert a negative impact on factors like total factor productivity and stock price crash risk (Ahsan et al., 2020b; Jin et al., 2019), others posit that EPU presents opportunities for profit, particularly for risk-takers (Knight, 1921; Lane & Maxfield, 1996). The interplay between EPU and sustainable growth requires nuanced consideration. Moreover, the diversity in investment strategies significantly influences sustainable growth. Firms often diversify their investments during EPU, reducing overall risk and enhancing profit potential (Song & Shoji, 2016). Conversely, a concentrated investment approach may yield superior returns but also entails greater risk, aligning with the efficient market hypothesis. Sustainable growth is directly influenced by companies' varied investment strategies.

Changes in companies' investment decisions during EPU, marked by increased prudence, also impact their fundraising methods. The traditional large-scale investments by individuals or agents may decrease, giving rise to alternative methods like crowdfunding (Mason & Harrison, 2015). EPU influences investment decisions and subsequently affects companies' financing methods, leading to shifts such as declined angel investors and venture capitalists favoring conservative industries (Mason & Harrison, 2015; Truong & Nagy, 2021). This shift may result in some companies facing insufficient funds and potential bankruptcy.

According to the above analysis, EPU must have influences on the sustainable growth of firms. In this way, following hypotheses are proposed:

Hypothesis 1

Economic policy uncertainty (EPU) is negatively related to the sustainable growth of firms.

2.2 Economic policy uncertainty and corporate sustainable growth: SMEs vs non-SMEs

The correlation between the sustainable growth of firms and Economic Policy Uncertainty (EPU) within Chinese firms remains ambiguous. Both non-SMEs and SMEs, constituting integral components of China's overall enterprises, strive for enhanced organizational performance to achieve sustainable business growth (Virakul, 2015). However, the decision-making processes of SMEs differ from non-SMEs. SMEs typically follow a problem-solution-analysis progression, while non-SMEs tend to employ a problem-analysis-solution sequence. This variation in the sequence of steps could yield distinct impacts on future decisions and the sustainable growth of firms (Hang & Wang, 2012). Furthermore, these divergent decision-making approaches result in varying proportions of the impact of individual decisions on their respective sustainable development. For SMEs in China, decision-making plays a pivotal role in their sustainable growth (Schwab et al., 2017). In times of uncertainty, Chinese firms lean towards adopting more conservative strategies, including the postponement of spending, hiring, and investment, coupled with an increase in precautionary savings (Al-Thaqeb & Algharabali, 2019; Gu et al., 2021).

The influence of EPU on the decision-making of enterprises in China varies based on their size. Grounded in shareholder and stakeholder theories, satisfying the needs of shareholders or stakeholders necessitates a sustainable operating environment for Chinese firms' growth (Ahsan et al., 2020b). Particularly for Chinese SMEs, profit generation remains a primary goal. Consequently, entrepreneurs' decisions in SMEs are expected to be more cautious under EPU compared to their non-SME counterparts (Gu et al., 2021; Hang & Wang, 2012; Schwab et al., 2017). The Real Options Theory provides a valuable framework for comprehending firms' responses to EPU. Trigeorgis (1995) posits that firms perceive decisions as real options, affording flexibility to adapt to uncertainties. In the context of EPU, firms may regard strategic decisions as options, allowing them to defer, expand, or abandon projects in response to evolving uncertainties. Empirical evidence substantiates the relevance of the Real Options Theory in elucidating firms' strategic choices amid EPU. Gu et al. (2021) find that firms might postpone financing decisions when facing EPU, employing a real options approach to navigate uncertain economic conditions. However, the Institutional Theory, as advanced by Scott (2013), proposes that firms adhere to institutional norms to secure legitimacy and support. In the realm of EPU, Chinese firms, especially SMEs, may align their strategies with institutional expectations to bolster legitimacy and navigate uncertainties. Empirical studies lend credence to the institutional perspective, indicating that firms aligning with environmental norms and expectations fare better under EPU conditions. This is particularly pertinent in the context of green business practices, which enhance legitimacy and garner support (Cui et al., 2020; Ng, 2018).

Echoing global market trends, EPU can exert adverse effects on the sustainable growth of Chinese firms (Li et al., 2021). EPU is linked to a reduction in total factor productivity (Li et al., 2021) and an elevated risk of bankruptcy for suppliers of raw materials (Wang et al., 2014). Additionally, for many SMEs, a lack of capital poses a substantial threat of bankruptcy, whereas for non-SMEs, this issue may be mitigated due to the "too-big-to-fail" theory (Schwab et al., 2019). In light of the aforementioned analysis, the sustainable growth of Chinese firms is indeed influenced by EPU. Consequently, we posit the following hypotheses:

Hypothesis 2a

Economic policy uncertainty (EPU) negatively influences the sustainable growth of Chinese SMEs.

Hypothesis 2b

Economic policy uncertainty (EPU) negatively influences the sustainable growth of Chinese non-SMEs.

2.3 Green business practices, economic policy uncertainty and corporate sustainable growth

Green business practices encompass the measures and strategies adopted by firms to mitigate their environmental footprint and uphold social responsibility while concurrently maintaining or enhancing their economic performance (Truong & Nagy, 2021). These practices encompass a broad spectrum, including but not limited to energy efficiency, renewable energy utilization, waste management, green product design, green marketing, development of green supply chains, innovations in green technologies, and engagement in corporate social responsibility (CSR) initiatives (Ashton et al., 2017; Fang et al., 2022; Liao et al., 2019). Recognizing the significance of green business practices, firms deploy them to attain competitive advantages, bolster customer satisfaction, fortify reputation, adhere to regulations, and contribute to sustainable development (Truong & Nagy, 2021).

Concurrently, a segment of the literature underscores the emergence of green finance as an irreversible trend driving economic transformation (Cui et al., 2020). This trend profoundly influences environmentally sustainable development, a facet of sustainable business growth. Green finance facilitates the more effective utilization of resources, addressing issues arising from lower utilization rates (Ng, 2018). It represents a protracted developmental trajectory, wherein companies with green business practices augment the efficiency of resource allocation and expedite the transition of their developmental models (Cui et al., 2020). Consequently, it can be posited that green business practices exert a positive influence on a company's sustainable business growth.

However, the operationalization of green business practices necessitates corresponding tools, which, in turn, require financial resources for construction (Volz, 2018). These funds may originate from private or public sectors; nevertheless, as noted earlier, the conservative investment behavior of investors during Economic Policy Uncertainty (EPU) complicates the task of securing adequate funds to wholly support green business practices (Falcone, 2020; Hou et al., 2022; Huang et al., 2012; Volz, 2018). Given imperfect implementation, it becomes challenging to ascertain whether such practices will positively impact firms' sustainable growth or potentially yield negative consequences in the short term.

In light of the above analysis, the effects of green business practices on the sustainable growth of firms can be positive or negative. Furthermore, during periods of EPU, it remains uncertain whether green business practices will act as a reinforcing, attenuating, or neutral factor in influencing the impact of EPU on the sustainable growth of firms. Consequently, the third hypothesis posits:

Hypothesis 3

Green business practices play a moderating role in influencing the impact of Economic Policy Uncertainty (EPU) on the sustainable growth of firms.

2.4 Green business practices, economic policy uncertainty and corporate sustainable growth: SMEs vs non-SMEs

In the context of Chinese firms engaging in green business practices, both non-SMEs and SMEs encounter the necessity of increased capital investment compared to non-green counterparts (Porter, 1991). Environmental regulations impose economic constraints, compelling enterprises to escalate costs associated with pollution reduction (Falcone, 2020). Particularly for SMEs, reliance on public support becomes integral for the execution of green business practices, offering a means to mitigate financial risks (Lüdemann & Ruppel, 2013; Scarpellini et al., 2018). However, SMEs might struggle to establish a mutually beneficial relationship between green business practices and the sustainable growth of firms due to resource constraints such as technology and human resources (Huang et al., 2012). Furthermore, Economic Policy Uncertainty (EPU) exerts a detrimental impact on companies' inclination to adopt green business practices, reducing green total factor productivity (Hou et al., 2022; Song et al., 2021). Conversely, EPU introduces diversification in investment behavior, leading to an upswing in outward foreign direct investment. This augmentation extends to the realms of green total factor productivity, green labor productivity, and the sustainable growth of firms (Song et al., 2021). Notably, green total factor productivity and green labor productivity serve as key indicators of green business practices adopted by non-SMEs and SMEs in China.

Guided by the Real Options Theory, which posits that firms can derive strategic flexibility and value by creating and exercising options under uncertainty, EPU is seen to impact the value and exercise of such options, particularly for SMEs (Hamza et al., 2023; Temouri et al., 2020). The limited resources and capabilities of SMEs to navigate the uncertain environment can be positively influenced by green business practices, reducing uncertainty, complexity, and irreversibility in investments while fostering learning and innovation opportunities amid EPU(Hamza et al., 2023; Temouri et al., 2020). The Institutional Theory underscores that firms can enhance legitimacy and support by aligning with the norms, values, and rules of the institutional environment (Bin‐Feng et al., 2022). EPU, with its potential to disrupt the stability and predictability of the institutional environment, especially affects SMEs that possess comparatively less influence and protection than larger and listed firms (Shankar, 2020). Green business practices emerge as mechanisms that amplify legitimacy and support for SMEs by signaling compliance and adaptation to institutional pressures and expectations during EPU (Ng, 2018).

Conclusively, akin to the broader market, the impact of green business practices on the sustainable growth of Chinese firms may vary. However, EPU influences green business practices differently for Chinese non-SMEs and SMEs. Building on this analysis, this study hypothesis that:

Hypothesis 4a

Green business practices play a positive moderating role in influencing the impact of Economic Policy Uncertainty (EPU) on the sustainable growth of Chinese SMEs/non-SMEs.

Hypothesis 4b

Green business practices play a negative moderating role in influencing the impact of Economic Policy Uncertainty (EPU) on the sustainable growth of Chinese SMEs/non-SMEs.

3 Methodology

3.1 Data sources and sample selection

This research investigates into the influence of economic policy uncertainty (EPU) on the sustainable growth of A-share non-financial listed firms in China between 2010 and 2022, also exploring the moderating impact of green business practices. Consistent with the methodology outlined by (Ahsan et al., 2020a), the study specifically excludes financial firms, those undergoing special treatment, facing delisting risk, and those involved in special transfers. Additionally, firms with either no or negative financial assets are excluded from the analysis. The dataset comprises information from 2771 firms, totaling 36,852 observations, of which 1674 are identified as Small and Medium-sized Enterprises (SMEs), and 1,097 as non-SMEs. Financial and sustainable growth data are sourced from the China Stock Market and Accounting Research (CSMAR) databaseFootnote 1, while economic policy uncertainty data is extracted from Baker et al. (2016)Footnote 2. Information on green practices is amalgamated from the CSMAR database, the Wind databaseFootnote 3, and the RKS databaseFootnote 4. The research employs a range of robust econometric techniques to meticulously analyze the data, ensuring the credibility and validity of our findings.

3.2 Measurement of variables

Table 1 presents all the dependent variable, independent variables, control variable and moderating variables along with their measurement proxies.

Table 1 Variable description
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3.3 Dependent variable

3.3.1 Sustainable growth of firms

This paper uses sustainable growth of firms as a proxy of firms’ ability to operating continuously with a relatively good performance. Following some studies (Ahsan et al., 2020b; Schwab et al., 2017), this study uses [(Net Profit/Average Balance of Total Owners' Equity) * [1—Dividend per Share Before Taxes / (Net Profit in Current Period/Average Balance of Paid-in Capital)], that is, Sustainable Growth Rate = Return on Equity * (1—Dividend Distribution Ratio); Average Balance = (Beginning Balance + Ending Balance) / 2 as a sustainable growth. The data of this variable is collected from China Stock Market and Accounting Research (CSMAR) database.

3.4 Independent variable

3.4.1 Economic policy uncertainty

The quantification of Economic Policy Uncertainty (EPU) presents a substantial challenge owing to its inherently qualitative nature. Previous studies have employed diverse methods, including assessing the dispersion in economic forecasts or examining the second moment of firm-level data, to capture this uncertainty (Jurado et al., 2015). Notably, Baker et al. (2016) address this challenge by introducing a news-based index to gauge the overall level of policy uncertainty. This index is constructed by tallying the occurrences of relevant terms in newspaper articles, specifically those related to the economy, policy, and uncertainty within a given country or region. The authors further provide sub-indices for specific policy categories, such as fiscal, monetary, trade, and regulatory policies. Widely embraced in the literature, the news-based EPU index serves as a valuable tool for investigating the repercussions of EPU on various economic outcomes. Therefore, in alignment with Mirza and Ahsan (2020), this paper adopts the logarithm of annual EPU index values for regression analysis.

3.5 Moderating variable

3.5.1 Green business practices

In accordance with Szczuka (2015) and Huang and Mirza (2022), who asserts that Corporate Social Responsibility (CSR) often serves as an indicative measure of green business practices, we have opted for CSR as a proxy for assessing corporate sustainability performance. Corporate Social Responsibility involves corporations actively safeguarding the legitimate rights and interests of stakeholders, participating in public welfare initiatives such as environmental protection, and promoting sustainable development alongside pursuing economic objectives and protecting shareholders' interests (Derwall et al., 2005). This study utilizes the HEXUN Corporate Social Responsibility rating system to appraise the sustainability performance of corporations. Encompassing all Shanghai and Shenzhen A-share listed companies, this system conducts a comprehensive evaluation based on five dimensions: shareholder responsibility, employee responsibility, supplier, customer, and consumer rights and interest responsibility, environmental responsibility, and social responsibility. The assessment includes a total of 13 secondary indicators and 37 tertiary indicators (Zhang et al., 2023; Zhong et al., 2019). Appendix provides a detailed overview of the rating standards.

3.6 Control variables

Based on extant literature, this study uses various control variables, including fir size, firm leverage, corporate risk, TobinsQ, corporate financialization, The Number of Board of Directors, Average of Age of board of directors, female board of directors’ ratio and ownership concentration of ultimate controller (Bin-Feng et al., 2023; Huang & Mirza, 2022; Scarpellini et al., 2018; Schwab et al., 2019; Zhang et al., 2023).

4 Modelling

Model 1 is constructed to explore the influence of EPU on the sustainable growth of Chinese firms overall (H1a and H1b). Additionally, Model 2 is employed to examine the correlation between EPU and the sustainable growth of Chinese SMEs and non-SMEs, with their size serving as the determining factor (H2a and H2b):

$${{\text{SG}}}_{it}={\beta }_{0}+{\beta }_{1}{EPU}_{t}+{\beta }_{2}{CONT}_{it}+{YR}_{t}+{\mu }_{i}+{\varepsilon }_{it}$$
(1)
$${{\text{SG}}}_{it}={\beta }_{0}+{\beta }_{1}{EPU}_{t}+{\beta }_{2}{SME}_{it}+{\beta }_{3}{CONT}_{it}+{YR}_{t}+{\mu }_{i}+{\varepsilon }_{it}$$
(2)

where \({{\text{SG}}}_{it}\) is sustainable growth of firms for the ith firm at time t, \({EPU}_{t}\) is the logarithm of EPU for all the firm at time t, \({SME}_{it}\) is the dummy variable where 1 represents for SMEs and 0 for non-SMEs, \({CONT}_{it}\) represents control variables for the ith firm at time t, \({YR}_{t}\) is year fixed effects, \({\mu }_{i}\) is industry fixed effects, \({\varepsilon }_{it}\) is the error component for the ith firm at time t, and \({\beta }_{0}\) is the constant term.

Further, to investigate the moderating impact of green business practices on the relationship between EPU and sustainable growth of all Chinese entrepreneurs and SMEs and non-SMEs (H3, H4), the econometric models are developed below (model 3&4):

$${SG}_{it}={\beta }_{0}+{\beta }_{2}{EPU}_{t}+ {\beta }_{3} {GP}_{it}+ {\beta }_{4}{EPU}_{t}*{GP}_{it}+{\beta }_{5}{CONT}_{it}+{YR}_{t}+{\mu }_{i}+{\varepsilon }_{it}$$
(3)
$${SG}_{it}={\beta }_{0}+{\beta }_{2}{EPU}_{t}+ {\beta }_{3} {GP}_{it}+ {\beta }_{4}{EPU}_{t}*{GP}_{it}{ + \beta }_{2}{SME}_{it}+{\beta }_{5}{CONT}_{it}+{YR}_{t}+{\mu }_{i}+{\varepsilon }_{it}$$
(4)

where \({GP}_{it}\) is a measured index of green business practices for the ith firm at time t, \({EPU}_{t}*{GP}_{it}\) is the interaction term between green business practices and logarithm of EPU.

5 Empirical analysis

5.1 Descriptive statistics

Table 2 reports the descriptive statistics for the complete sample and different subsamples. Panel A displays the descriptive statistics of the complete dataset, which comprises 2771 firms and 36,852 firm-year observations. The mean value of sustainable growth of firm (SG) is 0.041, with a standard deviation of 0.078, a minimum value of −0.320, and a maximum value of 0.316. The median value is 0.040, which indicates that the sustainable growth rate of firms varies across the sample. The mean value of logarithm of economic policy uncertainty (EPU) is 4.834, with a standard deviation of 0.530, a minimum value of 4.523, and a maximum value of 5.967. The median value is 4.834, which indicates that the EPU faced by the firms does not vary too much during the study period. Green business practices (HeXun CSR) values have a mean value of 23.361, a standard deviation of 15.530, a minimum value of −3.580, and a maximum value of 74.210. These values show variations among firms regarding their green business practices. Control variables values are consistent with the literature.

Table 2 Descriptive statistics: full sample
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Panel B and Panel C show the descriptive statistics for the subsamples of SMEs and non-SMEs, respectively. The mean and median values of SG for SMEs are 0.043 and 0.067, respectively, which are higher than those for the full sample. This indicates that SMEs put more efforts to achieve sustainable growth. The mean and median values of EPU for SMEs are also higher than those for the full sample, which indicates that SMEs are more exposed to policy uncertainties. However, the mean and median values of GP for SMEs are lower than those for the full sample, which indicates that SMEs put less efforts towards green business practices. On the other hand, the mean and median values of SG for non-SMEs are lower than those for the full sample, which indicates that non-SMEs put less efforts towards sustainable growth. The mean and median values of EPU for non-SMEs are also lower than those for the full sample, which indicates that non-SMEs are less exposed to policy uncertainties. However, the mean and median values of GP for non-SMEs are higher than those for the full sample, which indicates that non-SMEs put more efforts towards society well-being in the form of green business practices. Control variables also show variations in both subsamples.

5.2 Correlation analysis

Table 3 shows the results of Pearson's pairwise correlation between the variables. It shows that SG negatively correlated with EPU, indicates that the EPU may support the growth of sustainable growth that confirms our hypothesis H1. However, results indicate that green practices have a positive and significant impact on corporate sustainable growth in China. This implies that firms that adopt more environmentally friendly and socially responsible practices can enhance their long-term performance and competitiveness. This finding is consistent with the literature that suggests that green practices can create value for firms by reducing costs, increasing revenues, improving reputation, and mitigating risks (Chen et al., 2006; Huang & Mirza, 2022; Schaltegger et al., 2012). Among the control variables, the results show that SG is positively correlated with Size, Risk, TobinQ, Board of directors, Board of directors average Age and Ownership Concentration, while Leverage, Liquidity, Financialization and Duality show negative correlation. These results are consistent with literature (Allen et al., 2005; Huang & Mirza, 2022; Tomaskovic-Devey et al., 2015).

Table 3 Pairwise correlations
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5.3 Regression analysis and robustness

Table 4 reports the regression results to examine the impact of economic policy uncertainty (EPU) on sustainable growth of firms (SG). Column 1 shows that EPU has a negative and significant association with SG without control variables. Column 2 shows that this result holds after adding control variables for the overall sample, which implies that higher EPU reduces the ability of firms to increase their sales and profits over time, while maintaining their financial health and social responsibility. Columns 3 and 4 show that this result also holds for the subsamples of SMEs and non-SMEs, respectively, which confirms our hypothesis H1 and H2b. This finding is in line with the literature that suggests that EPU creates uncertainty and risk for firms' expectations and behaviors regarding investment, financing, employment, and innovation (Akron et al., 2020; Baker et al., 2016; Gu et al., 2021).

Table 4 The impact of EPU on sustainable growth
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To validate the above findings, we have employed a fixed effect model with robust standard errors. The results are consistent with the primary findings and are shown in columns 5 (overall), 6 (SME) and 7 (N-SME). To account for the lag effect of EPU, we have used lagged EPU to examine its relationship with corporate sustainable growth. The results are consistent with the primary findings and are presented in columns 8, 9 and 10 for the overall, SMEs and non-SMEs samples, respectively. To address the endogeneity issue, we have taken a more robust approach by using instrumental GMM estimation in Table 5. The results are consistent with the primary findings and confirm our hypothesis H1 and H2b.

Table 5 Robustness: The impact of EPU on sustainable growth
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5.4 Moderating analysis and robustness

Further, Table 6 checks the moderating effect of green business practices (GP) on the relationship between EPU and SG. Columns 1–3 show regression findings based on OLS estimation. The findings suggest that green business practices can mitigate the detrimental effect of EPU on sustainable growth on all subsamples, which supports our hypothesis H3 and H4a. This implies that firms that adopt more environmentally friendly and socially responsible practices can cope better with the uncertain environment and enhance their long-term performance and competitiveness. This finding is in line with the literature that suggests that green business practices can create value for firms by reducing costs, increasing revenues, improving reputation, and mitigating risks (Ashton et al., 2017; Babiak & Trendafilova, 2011; Huang & Mirza, 2022). The findings also indicate that the moderating effect of green business practices is consistent for both SMEs and non-SMEs at 1% level, which means that the effect is statistically significant and robust across different types of firms.

Table 6 Moderating role of green practices (GP) and robustness
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To validate these findings, this study employs various methods. At first, this study uses an alternative measure of GP by replacing it with RKS CSR ratings scoresFootnote 5 (GP*). RKS and Hexun are the two most widely used CSR ratings in research on CSR in China's capital market, but they have different rating methods, information sources, and sub-indicator weights (Zhong et al., 2019). Therefore, using RKS ratings instead of Hexun CSR ratings to examine the moderating effect of green business practices is a good robustness method because it can test the sensitivity and validity of the results. Table 6 columns 4–6 report findings show consistency with primary findings. Moreover, this study also uses an alternative model by replacing OLS with fixed effects estimation. Columns 7–9 findings show their consistency with primary findings. Furthermore, this study also uses GP* with fixed effect (see columns 10–12) which also confirms the primary findings. This study also considers the time lag-effect by conducting dynamic panel data estimation (see columns 13–15) and finds consistency with primary findings.

5.5 Heterogeneity analysis

Table 7 shows the findings of the heterogeneity analysis which reveals that the negative impact of EPU on CSG is more pronounced in big firms, highly leveraged firms, firms with low liquidity and low financialization in China. This means that these types of firms are more vulnerable to the adverse effects of EPU on their CSG, compared to other types of firms. There are several possible explanations for these findings:

  1. 1.

    Big firms may have more exposure to EPU, as they are more likely to operate in multiple markets and sectors, and to be affected by various economic policies (Chen et al. 2019). Big firms may also have more difficulties in adjusting their operations and strategies in response to EPU, due to their complexity and inertia (Peng and Liu 2018).

  2. 2.

    Highly leveraged firms may have more financial constraints and risks under EPU, as they have higher debt obligations and lower credit availability (Drobetz et al. 2018). Highly leveraged firms may also have less flexibility and resilience in coping with EPU, as they have less financial slack and more financial distress (Liu and Zhang 2019).

  3. 3.

    Firms with low liquidity may have less access to financial resources and opportunities under EPU, as they have lower cash flow and higher liquidity risk (Wang et al. 2014). Firms with low liquidity may also have less capacity and incentive to invest in innovation and creation under EPU, as they have lower cash reserves and higher uncertainty (Yu and Jin 2022).

  4. 4.

    Firms with low financialization may have less diversification and hedging benefits under EPU, as they have lower financial assets and income (Dibiasi et al. 2018). Firms with low financialization may also have less protection and support from the financial sector under EPU, as they have lower financial intermediation and integration (He et al. 2020).

Table 7 Heterogeneity analysis
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These explanations suggest that the negative impact of EPU on CSG is more pronounced in firms that have more exposure, constraints, risks, and uncertainties under EPU, and less flexibility, resilience, resources, and opportunities to deal with EPU. These findings have important implications for both theory and practice, as they demonstrate the heterogeneity and contingency of the relationship between EPU and CSG, and provide insights for managers and policymakers to enhance the CSG of different types of firms under EPU.

5.6 Channeling analysis

This study conducts a channeling analysis to find out if EPU effects sustainable growth of Chinese firms, then which specific policy factors causes. For this purpose, this study conducts a channeling analysis based on Fiscal policy uncertainty, Monetary policy uncertainty, Trade policy uncertainty and exchange rate policy uncertainty. Table 8 findings show that all policy uncertainty factors show positive association with SG but Trade policy uncertainty. Different types of policy uncertainty may have different effects on corporate sustainable growth, depending on the nature and direction of the policies. Fiscal policy uncertainty, monetary policy uncertainty, and exchange rate policy uncertainty may have positive effects on corporate sustainable growth, if they reflect the government's efforts to stimulate the economy, support innovation, and enhance competitiveness (Baker et al., 2016). As, fiscal policy uncertainty may signal the possibility of tax cuts, subsidies, or public spending, which may benefit firms' revenues and profits. Monetary policy uncertainty may signal the possibility of interest rate cuts, quantitative easing, or credit expansion, which may reduce firms' financing costs and increase their liquidity. Exchange rate policy uncertainty may signal the possibility of currency depreciation, intervention, or adjustment, which may improve firms' export performance and market share.

Table 8 Channelling analysis
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However, trade policy uncertainty may have a negative effect on corporate sustainable growth, if it reflects the government's protectionism, trade wars, or trade barriers, which may harm firms' trade flows and market access. Trade policy uncertainty may signal the possibility of tariffs, quotas, sanctions, or disputes, which may increase firms' trade costs and reduce their demand and competitiveness. Trade policy uncertainty may also create spillover effects and disrupt the global value chains, which may affect firms' supply and production. Therefore, trade policy uncertainty may reduce firms' sales and profits, and hinder their sustainable growth (Ahsan et al., 2020a; Baker et al., 2016).

6 Discussion and implications

The results suggest that economic policy uncertainty (EPU) has a negative impact on the corporate sustainable growth (SG) of Chinese non-financial firms, especially for non-SMEs. This means that higher EPU reduces the ability of firms to increase their sales and profits over time, while maintaining their financial health and social responsibility. This finding is consistent with the literature that suggests that EPU creates uncertainty and risk for firms' expectations and behaviors regarding investment, financing, employment, and innovation (Baker et al., 2016; Huang & Mirza, 2022). EPU may also constrain firms' access to finance and resources, divert their attention from productive and sustainable investments, and increase their financial distress and bankruptcy costs (Guan et al., 2021).

The results also indicate that the negative effect of EPU on SG is more influenced by trade policy uncertainty than by fiscal, monetary, and exchange rate policy uncertainty. This may be because trade policy uncertainty reflects the government's protectionism, trade wars, or trade barriers, which may harm firms' trade flows and market access (Baker et al., 2016). Trade policy uncertainty may also create spillover effects and disrupt the global value chains, which may affect firms' supply and production (Hamza et al., 2023). Therefore, trade policy uncertainty may reduce firms' sales and profits, and hinder their sustainable growth.

The results also suggest that green business practices have a positive moderating effect on the negative relationship between EPU and SG across all the subsamples, including SMEs and non-SMEs. This implies that firms that adopt more environmentally friendly and socially responsible practices can cope better with the uncertain environment and enhance their long-term performance and competitiveness (Ilyas et al., 2022). This finding is in line with the literature that suggests that green business practices can create value for firms by reducing costs, increasing revenues, improving reputation, and mitigating risks (Chen et al., 2019).

However, the real option theory perspective infers that EPU reduces the value of firms' real options to invest, expand, grow, or switch use of their real assets, as it increases the uncertainty and risk of the future cash flows and the opportunity cost of investing (Trigeorgis, 1995). Trade policy uncertainty may have a stronger effect than other types of policy uncertainty, as it affects both the demand and the supply side of the firms' real options. Green business practices may increase the value of firms' real options, as they reduce the costs and risks, and increase the revenues and flexibility of the firms' real assets (Martínez Ceseña et al., 2013; Trigeorgis & Reuer, 2017).

From the institutional theory perspective, EPU reflects the institutional voids or weaknesses in the political and regulatory environment, which increase the transaction costs and reduce the legitimacy of the firms' activities (Ahsan et al., 2020a; Jennings & Zandbergen, 1995). Trade policy uncertainty may reflect the institutional instability or conflict in the international trade system, which may affect the firms' institutional embeddedness and isomorphism (Peng et al., 2008). Green business practices may reflect the institutional pressures or opportunities for the firms to conform to the environmental and social norms and expectations of their stakeholders, which may enhance their institutional legitimacy and performance (Campbell, 2007).

7 Conclusion and recommendations

This paper explores the impact of economic policy uncertainty (EPU) in China on the sustainable growth of Chinese non-financial A-share firms, and the moderating role of green business practices. Using a news-based index of EPU and a large sample of 2771 firms from 2010 to 2022, we find that EPU has a detrimental effect on the sustainable growth of firms, especially non-SMEs. Moreover, we find that green business practices can mitigate the negative impact of EPU on sustainable growth, and that this mitigating effect is stronger for SMEs. Furthermore, the heterogeneity analysis reveals that the negative impact of EPU on CSG is more pronounced in big firms, highly leveraged firms, firms with low liquidity and low financialization in China. Our findings have several implications and recommendations for both managers and policymakers.

First, our study contributes to the literature on EPU and firm performance by providing empirical evidence on the negative impact of EPU on the sustainable growth of Chinese firms, and the moderating role of green business practices. We also extend the literature by applying different theoretical perspectives, such as real option theory and institutional theory, to explain the mechanisms and contingencies of the EPU-SG relationship. Second, our study provides practical guidance for managers to cope with the uncertain and dynamic environment, and to enhance their long-term performance and competitiveness. We suggest that managers should adopt more green business practices, such as environmental protection, energy conservation, emission reduction, and green innovation, as they can reduce the costs and risks, and increase the revenues and flexibility of the firms. We also suggest that managers should diversify their markets and products, hedge their foreign exchange exposure, improve their operational efficiency and innovation, and enhance their corporate governance and social responsibility, as they can reduce the negative impact of EPU on their sustainable growth. Third, our study offers policy implications for policymakers to reduce the level and volatility of EPU, and to provide more stable and predictable policy environment for firms. We suggest that policymakers should improve the transparency and credibility of policy making, coordinate the domestic and international policies, and resolve the trade disputes and tensions with other countries, as they can reduce the uncertainty and risk for firms. We also suggest that policymakers should support and incentivize the green business practices of firms, and promote the transition to a low-carbon and circular economy, as they can enhance the social welfare and environmental sustainability.However, our study also has some limitations and directions for future research. First, our study relies on a news-based index of EPU, which may not capture the full spectrum of policy uncertainty, and may be subject to measurement errors and biases. Future research could use alternative measures of EPU, such as survey-based or market-based indicators, or construct a more comprehensive and refined index of EPU. Second, our study focuses on the Chinese context, which may limit the generalizability of our findings to other countries or regions. Future research could conduct cross-country or cross-regional comparisons, or examine the impact of EPU in different institutional settings or cultural contexts. Third, our study uses a static and linear approach to examine the EPU-SG relationship, which may not capture the dynamic and nonlinear nature of the relationship. Future research could use a dynamic and nonlinear approach, such as panel vector autoregression or threshold regression, to explore the causal effects and the threshold effects of EPU on SG. Fourth, our study uses a single measure of SG, which may not reflect the multidimensional and complex concept of SG. Future research could use multiple measures of SG, such as economic, social, and environmental indicators, or develop a composite index of SG. Fifth, our study does not consider the potential endogeneity or reverse causality between EPU and SG, or between green business practices and SG. Future research could use instrumental variables or natural experiments to address the endogeneity or reverse causality issues, and to establish the causal inference of the relationships.