Circular Economy, Environmental Responsibility, and Eco‐Design for Sustainable Performance Under Regulatory Pressure in China

ABSTRACT Drawing on the Natural Resource Based View and institutional theory, this study examines how circular economy practices (CEP), corporate environmental responsibility (CER), and eco‐design orientation (EDO) influence sustainable organizational performance (SOP) in Chinese manufacturing firms. Specifically, the study investigates the mediating roles of environmental innovation capability (EIC) and environmental performance (EP) in the relationships between CEP, CER, EDO and SOP, while also exploring the moderating role of environmental regulatory pressure (ERP) on the EIC–SOP and EP–SOP relationships. Using three‐wave time‐lagged survey data collected from 360 managers and analyzed through partial least squares structural equation modeling (PLS‐SEM), the outcome reveals that CEP, CER, and EDO positively influence EIC and EP, which in turn enhance SOP. Furthermore, EIC and EP significantly mediate the links between CEP, CER, EDO and SOP, whereas ERP positively moderates both the EIC–SOP and EP–SOP relationships, thereby strengthening the effectiveness of capability‐based and outcome‐based mechanisms under stricter regulatory environments. This study advances prior sustainability research by simultaneously distinguishing EIC as a capability‐based pathway and EP as an outcome‐based pathway linking CEP, CER, and EDO with SOP, while identifying ERP as a boundary condition that strengthens both pathways. For practitioners, the findings suggest that firms should integrate circular economy initiatives with corporate environmental responsibility and eco‐design orientation while simultaneously building environmental innovation capability and improving environmental performance to achieve superior sustainable outcomes under regulatory expectations. For policymakers, the results imply that well‐designed environmental regulations not only directly encourage green practices but also amplify the positive effects of firms' internal capabilities and environmental performance on long‐term sustainability, highlighting the need for consistent, progressively stringent regulatory frameworks that reward genuine innovation rather than mere compliance.