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

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.