IDEAS home Printed from https://ideas.repec.org/a/bla/bstrat/v35y2026i3p4484-4494.html

Dynamic Capabilities for Circular Economy: Leadership, Eco‐Innovation, and the Mediating Role of Digital Transformation

Author

Listed:
  • Ali Nawaz Khan
  • Huang Honglei
  • Mohsin Ali Soomro

Abstract

This study looks at how internal capabilities shape the adoption of circular economy (CE) practices in Pakistan's manufacturing sector. The focus is on three main levers: visionary leadership, eco‐innovation strategic orientation (EISO), and digital transformation (DT). Using survey data from 262 firms, analyzed through structural equation modeling, the study finds that leadership and strategy both matter, but in different ways. Visionary leaders help drive digital initiatives forward, while EISO has an even stronger pull, showing how much firms gain when sustainability becomes part of their innovation DNA. DT turns out to be the bridge linking leadership and strategy to CE outcomes, and its effectiveness depends heavily on whether an organization is “ready” for it, structurally, technically, and culturally. Drawing on dynamic capabilities theory, the paper highlights how these factors combine to push firms toward more CE practices. Beyond theory, the findings tie directly to the UN's Sustainable Development Goals, particularly those on industry, responsible consumption, and climate action.

Suggested Citation

  • Ali Nawaz Khan & Huang Honglei & Mohsin Ali Soomro, 2026. "Dynamic Capabilities for Circular Economy: Leadership, Eco‐Innovation, and the Mediating Role of Digital Transformation," Business Strategy and the Environment, Wiley Blackwell, vol. 35(3), pages 4484-4494, March.
    • Handle: RePEc:bla:bstrat:v:35:y:2026:i:3:p:4484-4494
    DOI: 10.1002/bse.70397
    as

    Download full text from publisher

    File URL: https://doi.org/10.1002/bse.70397
    Download Restriction: no
    File URL: https://libkey.io/10.1002/bse.70397?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    References listed on IDEAS

    as
    1. Singh, Shiwangi & Sharma, Meenakshi & Dhir, Sanjay, 2021. "Modeling the effects of digital transformation in Indian manufacturing industry," Technology in Society, Elsevier, vol. 67(C).
    2. Khalid Jamil & Wen Zhang & Aliya Anwar & Sohaib Mustafa, 2025. "Exploring the Influence of AI Adoption and Technological Readiness on Sustainable Performance in Pakistani Export Sector Manufacturing Small and Medium-Sized Enterprises," Sustainability, MDPI, vol. 17(8), pages 1-28, April.
    3. Farzana Parveen Tajudeen & Devika Nadarajah & Noor Ismawati Jaafar & Ainin Sulaiman, 2021. "The impact of digitalisation vision and information technology on organisations' innovation," European Journal of Innovation Management, Emerald Group Publishing Limited, vol. 25(2), pages 607-629, February.
    4. Owais Khan & Tiberio Daddi & Fabio Iraldo, 2020. "Microfoundations of dynamic capabilities: Insights from circular economy business cases," Business Strategy and the Environment, Wiley Blackwell, vol. 29(3), pages 1479-1493, March.
    5. Luigi Jesus Basile & Nunzia Carbonara & Umberto Panniello & Roberta Pellegrino, 2024. "The role of big data analytics in improving the quality of healthcare services in the Italian context: the mediating role of risk management," Post-Print hal-04753301, HAL.
    6. Dubey, Rameshwar & Bryde, David J. & Blome, Constantin & Dwivedi, Yogesh K. & Childe, Stephen J. & Foropon, Cyril, 2024. "Alliances and digital transformation are crucial for benefiting from dynamic supply chain capabilities during times of crisis: A multi-method study," International Journal of Production Economics, Elsevier, vol. 269(C).
    7. Hamada Hussein & Omaima Munawar Albadry & Viju Mathew & Bassam Samir Al-Romeedy & Omar Alsetoohy & Mahmoud Abou Kamar & Hazem Ahmed Khairy, 2024. "Digital Leadership and Sustainable Competitive Advantage: Leveraging Green Absorptive Capability and Eco-Innovation in Tourism and Hospitality Businesses," Sustainability, MDPI, vol. 16(13), pages 1-21, June.
    8. David J. Teece, 2007. "Explicating dynamic capabilities: the nature and microfoundations of (sustainable) enterprise performance," Strategic Management Journal, Wiley Blackwell, vol. 28(13), pages 1319-1350, December.
    9. Cai, Wenjing & Fan, Xueling & Wang, Qiqi, 2023. "Linking visionary leadership to creativity at multiple levels: The role of goal-related processes," Journal of Business Research, Elsevier, vol. 167(C).
    10. Yixuan Peng & Sayed Fayaz Ahmad & Muhammad Irshad & Muna Al-Razgan & Yasser A. Ali & Emad Marous Awwad, 2023. "Impact of Digitalization on Process Optimization and Decision-Making towards Sustainability: The Moderating Role of Environmental Regulation," Sustainability, MDPI, vol. 15(20), pages 1-23, October.
    11. Nasiri, Mina & Ukko, Juhani & Saunila, Minna & Rantala, Tero, 2020. "Managing the digital supply chain: The role of smart technologies," Technovation, Elsevier, vol. 96.
    12. David J. Teece, 2025. "The multinational enterprise, capabilities, and digitalization: governance and growth with world disorder," Journal of International Business Studies, Palgrave Macmillan;Academy of International Business, vol. 56(1), pages 7-22, February.
    13. Basile, L.J. & Carbonara, N. & Panniello, U. & Pellegrino, R., 2024. "The role of big data analytics in improving the quality of healthcare services in the Italian context: The mediating role of risk management," Technovation, Elsevier, vol. 133(C).
    Full references (including those not matched with items on IDEAS)

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Correia, Lucas Miguel Alencar de Morais & Sousa, Paulo Renato de & Frank, Alejandro G., 2025. "Aligning digital strategy and resources to create Healthcare 4.0 organizations: Implications for smart operations and smart working," Technological Forecasting and Social Change, Elsevier, vol. 221(C).
    2. Henri Harapan Saragih & Muhammad Saifi & Nila Firdausi Nuzula & Saparila Worokinasih, 2024. "The Role of Corporate Agility in Advancing Sustainable Strategy: Examining the Influence of Shareholder Activism and Board Commitment," Sustainability, MDPI, vol. 16(24), pages 1-18, December.
    3. Merín-Rodrigáñez, Joan & Dasí, Àngels & Alegre, Joaquín & Hughes, Mathew, 2025. "Dynamic managerial capabilities for digital transformation in innovative SMEs: What are the effects on new product development performance?," Journal of Business Research, Elsevier, vol. 201(C).
    4. Chotia, Varun & Khoualdi, Kamel & Broccardo, Laura & Yaqub, Muhammad Zafar, 2025. "The role of cyber security and digital transformation in gaining competitive advantage through Strategic Management Accounting," Technology in Society, Elsevier, vol. 81(C).
    5. Moustafa Elnadi & Mohamed Hani Gheith & Ciro Troise & Yasser Omar Abdallah & Mahmoud Abdelaziz Ahmed Abdelaziz, 2026. "Digital Transformation and Sustainable Supply Chain Performance for Sustainable Development: The Mediating Role of Supply Chain Capabilities," Sustainable Development, John Wiley & Sons, Ltd., vol. 34(S1), pages 611-637, January.
    6. Simone Sehnem & Adriane A. Farias S. L. de Queiroz & Susana Carla Farias Pereira & Gabriel dos Santos Correia & Edson Kuzma, 2022. "Circular economy and innovation: A look from the perspective of organizational capabilities," Business Strategy and the Environment, Wiley Blackwell, vol. 31(1), pages 236-250, January.
    7. Hulya Turkcan & Salih Zeki Imamoglu & Huseyin Ince & Serhat Erat, 2025. "Digital Capabilities and Circular Economy Practices to Enhance Environmental and Economic Performance: The Role of Digital Technology‐Environmental Strategy Alignment," Corporate Social Responsibility and Environmental Management, John Wiley & Sons, vol. 32(4), pages 5069-5087, July.
    8. Lin Wu & Jimmy Huang & Miao Wang & Ajay Kumar, 2024. "Unleashing supply chain agility : Leveraging data network effects for digital transformation," Post-Print hal-04850421, HAL.
    9. João M. Lopes & Sofia Gomes & Elisabete Nogueira, 2025. "Pathways to Circularity: Engagement Patterns of European SMEs in the Circular Economy," Business Strategy and the Environment, Wiley Blackwell, vol. 34(3), pages 3848-3864, March.
    10. Piyush Ranjan & Preeti Narwal, 2025. "Investigating Organizational Unlearning and Agility in Digital Transformation for improved Innovation Performance in an Emerging Economy: Moderating Roles of Digital Business Intensity and Firm Sizes," Global Journal of Flexible Systems Management, Springer;Global Institute of Flexible Systems Management, vol. 26(3), pages 601-623, September.
    11. Merín-Rodrigáñez, Joan & Dasí, Àngels & Alegre, Joaquín, 2024. "Digital transformation and firm performance in innovative SMEs: The mediating role of business model innovation," Technovation, Elsevier, vol. 134(C).
    12. Jagdish Bhagwat & Rekha Attri, 2026. "Logistic Capabilities as a Performance Enabler for Online Retailers," Vikalpa: The Journal for Decision Makers, , vol. 51(1), pages 58-75, March.
    13. Al-khatib, Ayman wael & AL-Shboul, Moh'd Anwer & Khattab, Mais, 2024. "How can generative artificial intelligence improve digital supply chain performance in manufacturing firms? Analyzing the mediating role of innovation ambidexterity using hybrid analysis through CB-SEM and PLS-SEM," Technology in Society, Elsevier, vol. 78(C).
    14. Jing An & Suicheng Li & Jianqi Qiao & Qingyun Yang, 2026. "The impact of smart supply chain management on supply chain transparency: a dynamic resource-based view," Operations Management Research, Springer, vol. 19(1), pages 1-24, March.
    15. Cubillas-Para, Clara & Cegarra-Navarro, Juan Gabriel & Vătămănescu, Elena-Mădălina, 2024. "Gliding from regenerative unlearning toward digital transformation via collaboration with customers and organisational agility," Journal of Business Research, Elsevier, vol. 177(C).
    16. Peng, Chen & Zhang, Yunsheng & Lai, Liubin, 2026. "A dual-path driving mechanism study of digital transformation on supply chain adaptation from the asymmetric network power perspective," Technology in Society, Elsevier, vol. 84(C).
    17. Jaysa Eliude Aguiar dos Santos & Cláudia Fabiana Gohr, 2026. "Resilience capability for the circular economy: a conceptual framework," Environment Systems and Decisions, Springer, vol. 46(2), pages 1-19, June.
    18. Bag, Surajit & Gupta, Shivam & Chan, Hau-Ling & Kumar, Ajay, 2024. "Building smart product-service systems capabilities for circular supply chains in the Industry 4.0 era," Transportation Research Part E: Logistics and Transportation Review, Elsevier, vol. 188(C).
    19. Wójcik, Piotr & Obłój, Krzysztof & Buono, Anthony F., 2022. "Addressing social concern through business-nonprofit collaboration: Microfoundations of a firm’s dynamic capability for social responsibility," Journal of Business Research, Elsevier, vol. 143(C), pages 119-139.
    20. Marino-Romero, Jorge Alberto & Palos-Sánchez, Pedro R. & Velicia-Martín, Félix, 2024. "Evolution of digital transformation in SMEs management through a bibliometric analysis," Technological Forecasting and Social Change, Elsevier, vol. 199(C).

    More about this item

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:bla:bstrat:v:35:y:2026:i:3:p:4484-4494. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Wiley Content Delivery (email available below). General contact details of provider: http://onlinelibrary.wiley.com/journal/10.1002/(ISSN)1099-0836 .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.