Leveraging Innovation for Sustainable Performance through Circular Economy Practices in Emerging Economies : A Study of Practices in Bangladeshi Textile SMEs

Abstract

This study investigates the relationship between innovation and sustainable performance in textile Small and Medium-sized Enterprises (SMEs) in Bangladesh, with a focus on the mediating role of Circular Economy (CE) practices. Grounded in Dynamic Capability Theory (DCT), the research explores how innovation acts as a dynamic capability to facilitate CE adoption and enhance sustainable performance across economic, social, and environmental dimensions in resource-constrained settings. A quantitative survey of 205 SME employees, with 188 valid responses, was analyzed using Structural Equation Modeling (SEM) to test direct and mediated relationships among innovation, CE practices, and sustainable performance. The findings reveal that while CE practices significantly enhance sustainable performance, innovation can hinder CE adoption if misaligned with sustainability principles. CE practices mediate the innovation-sustainability relationship, with suppressor effects observed when innovation strategies are not strategically aligned with CE goals, underscoring the importance of alignment for optimal outcomes. This study contributes to the literature by integrating CE practices as mediators in the innovation-sustainability relationship and extending DCT to resource-constrained contexts. To address observed challenges, the study proposes a conceptual model positioning Sustainability-Oriented Dynamic Capabilities (SODCs) as antecedents to sustainable performance, emphasizing their role in aligning innovation with CE practices. Practically, the research offers actionable insights for SME managers to align innovation strategies with CE principles and for policymakers to create supportive frameworks, including financial incentives and capacity-building programs, to enable CE adoption. By bridging theoretical advancements with practical solutions, this research provides a robust foundation for fostering sustainability in SMEs within developing economies, particularly in the resource-constrained textile sector of Bangladesh.