The role of circular economy principles and sustainable-oriented innovation to enhance social, economic and environmental performance: Evidence from Mexican SMEs

The UN's sustainable development goals underscore engaging supply-chain stakeholders with environmentally friendly practices. Small-and medium-size enterprises (SMEs) are key participants in several supply chains, but their operations often produce a significant environmental impact. Their transition to sustainable practices is challenging because they operate with constrained resources, which are mostly invested in pressing activities. Therefore, evidence is needed that shows the benefits of investing limited resources in sustainable activities to support decision-making in SMEs. Research has neglected to connect circular economy and sustainable-oriented innovation whilst accounting for external factors affecting the implementation of sustainable processes and technology within SMEs in developing countries. This paper fills that gap by analyzing the impact of external factors on the implementation of circular economy and technology, and their influence on sustainable-oriented innovation and sustainable performance. Responses from 165 Mexican SMEs have been collected and analyzed using structural equation modeling to test direct and indirect effects between constructs. Findings reveal that while both governmental support and customer pressure facilitate the adoption of circular economy, only governmental support contributes directly to technology implementation. They also highlight the value of circular economy to support the adoption of sustainable-oriented innovation and to mediate the relationship between technology implementation and sustainable-oriented innovation. The overarching finding is that circular economy promoting sustainability-oriented innovation has a positive impact on financial, environmental, and social performance. This is a key implication to inform managers in SMEs on the potential benefits of investing in sustainable solutions.