How and when circular economy practices drive financial performance: The role of organizational agility, operational efficiency, and digital technology adoption

Abstract

Despite growing interest in circular economy (CE) practices, the mechanisms for improving financial performance in micro and small enterprises (MSEs) remain underexplored, especially in developing economies. This study examines how CE practices enhance financial performance, both directly and indirectly, through organizational agility and operational efficiency. Additionally, the adoption of digital technology presents itself as a moderator in these relationships. Time-lagged data collection involved 451 Indonesian MSEs in the processing, fashion, and culinary sectors. Data were analyzed using PLS-SEM using SMART PLS 4.0. The findings reveal that CE practices have a positive effect on organizational agility, operational efficiency, and financial performance. Organizational agility and operational efficiency have been confirmed as key determinants of financial performance and partially mediate the relationship between CE practices and financial performance. Moreover, adopting digital technology strengthens the effects of CE practices on agility and operational efficiency. However, this did not directly moderate the relationship between CE practices and financial performance. This study makes three key contributions to the literature on the CE. First, it reveals that CE practices are a significant driver of organizational agility in MSEs. Second, this study empirically validates the parallel mediating roles of organizational agility and operational efficiency in translating CE practices into enhanced financial performance. Third, the findings highlight how MSEs in developing countries have successfully used digital tools to implement circular practices even with limited resources.