Environmental regulations, circular economy practices, and firm performance: Mediating evidence from Vietnamese SMEs

Although sustainable management literature extensively addresses the link between organizational performance and sustainable practices, evidence on the mechanisms through which environmental regulations translate into firm performance remains inconsistent. Findings on whether circular practices mediate this relationship are mixed, particularly within SMEs, where these mediating pathways remain largely untested. The circular economy has arisen as a solution to address sustainability concerns. This study examines the influence of environmental regulations and circular supply chain management on sustainable firm performance. It emphasizes the mediating role of circular economy practices and the moderating impacts of top management green commitment. Employing Partial Least Squares Structural Equation Modeling on survey data from 482 Vietnamese SMEs, the results indicate that both environmental regulations and circular supply chain management positively influence business performance, with circular economy practices acting as a partial mediator. Moreover, top management green commitment moderates the relationships between environmental regulations and circular economy practices and between circular supply chain management and circular economy practices, showing that top management green commitment determines how effectively environmental regulations and supply chain practices lead to circular economy actions - a finding that adds new insight beyond the widely recognized direct effect of leadership on sustainability outcomes. The results have significant implications for researchers, government officials, and company executives by elucidating how SMEs should adhere to environmental regulations and leverage circular supply chain management to enhance circular economy practices for sustainable efficiency in the context of developing countries. By integrating Institutional Theory and the Natural Resource-Based View, this study clarifies the regulatory and supply-chain pathways through which circular economy practices emerge, and how these practices translate into sustainable firm performance under varying levels of top management green commitment.Author summary: The study investigated how small and medium-sized enterprises in Vietnam can enhance long-term performance while advancing environmental sustainability. Drawing on survey data from 482 firms, the study examined the influence of environmental regulations and circular supply chain practices. Results show that both regulatory pressure and circular supply chain practices positively affect sustainable firm performance, with circular economy practices - such as waste reduction, resource recovery, and product-life extension - acting as a key mediating mechanism. These relationships are significantly strengthened when top management exhibits strong commitment to environmental goals. The findings demonstrate that, in developing economies, appropriately designed regulations can drive business success when firms implement circular practices supported by committed leadership. The study offers actionable guidance for policymakers, executives, and SMEs aiming to align profitability with sustainability through circular economy practices.