Toward circular economy: The impact of policy instruments on circular economy innovation for European small medium enterprises

The transition from current linear economy toward a circular economy (CE) needs the adoption and diffusion of circular economy innovation (CEI). However, the rate and direction of CEI influenced by policy instruments are still not well understood. This paper explores the roles of demand-pull and technology-push policy instruments in shaping CEI in Europe. The different impacts on the adoption across different sectors and the specific effects on each circularity innovation pattern are also examined. The findings indicate that both command-and-control regulation and technology-push instruments are significant in stimulating Small Medium Enterprises' (SMEs') adoption of CEI. While the environmental tax hinders SMEs' implementation of CEI in the whole economic activity sectors, it is a significant driver of CEI for SMEs in the manufacturing sector. The technology-push instrument strongly encourages SMEs to invest in re-planning and re-designing activities to minimize the usage or maximize the re-usage of water, energy, and materials. Environmental tax highly determines SMEs' adoption of CEI related to improving energy efficiency. In contrast, the command-and-control regulation significantly increases SMEs' likelihood to undertake innovation activity in minimizing waste by recycling or reusing the waste. Our study elucidates the potential interactions between policy instruments and CEI, paving the way toward the desirable CE.