Does Market Environment Foster Sustainable Competitiveness? The Mediating Role of Corporate Innovation in Chinese Private Firms

Abstract

In the context of economic uncertainty and institutional transformation in emerging economies, understanding how market environments influence firm performance has become increasingly important. This study examines the impact of the market environment on the sustainable profitability of Chinese private firms, with particular emphasis on the mediating role of corporate innovation. Using panel data from 4,635 Chinese private firms listed on the Shanghai and Shenzhen stock exchanges during 2015–2024, this study employs fixed-effects panel regression and a two-stage least squares (2SLS) approach to address potential endogeneity. The results show that a favorable market environment such as government governance quality, legal system development, financial assistance, and openness to international trade significantly enhances firm sustainable profitability. Firm innovation plays a partial mediating role, indicating that improved institutional conditions stimulate innovation, which in turn contributes to sustainable profitability. These findings remain robust after controlling for firm-level and regional factors. This study contributes to the literature by integrating transaction cost theory and the resource-based view to explain how institutional quality affects firm performance through innovation mechanisms. The findings highlight the importance of optimizing market environments and innovation-supporting institutions to promote the long-term competitiveness and sustainable development of private enterprises in emerging economies.