Min Xu, Hailan Guo
ABSTRACT Firm‐level decarbonisation is increasingly pursued as a strategic transition rather than a discrete compliance task, yet evidence remains limited on how resource‐constrained SMEs build routines that sustain progress towards carbon neutrality while maintaining performance. Drawing on dynamic capabilities theory and the resource‐based view, we conceptualise carbon‐neutrality capability (CNC) as a higher order capability through which firms sense carbon‐related regulatory and market shifts, seize viable low‐carbon options and reconfigure operating processes so that emissions management becomes embedded in managerial decision‐making. Using survey data from 342 Chinese manufacturing SMEs and partial least squares structural equation modelling, we find that stakeholder engagement and green manufacturing intensity are positively associated with CNC. CNC, in turn, is positively associated with both CSR performance and financial performance, with stronger associations for CSR outcomes. These findings reposition carbon neutrality as a capability‐building challenge for SMEs, including prioritising supplier‐facing collaboration and design‐anchored green routines that stabilise measurement, auditability and operational learning. For policy makers, the results imply that support schemes should reward verifiable capability development, rather than one‐off technology adoption, to improve the credibility and scalability of SME net‐zero transitions.