Driving Sustainable Transformation: Organizational Factors Fueling Circular Economy in Indonesian SMEs

Abstract

Previous research has identified internal organizational factors as barriers to adopting circular economy (CE) practices, but empirical evidence supporting this claim is limited. Additionally, the impact of these factors on sustainable business performance, particularly in developing economies and small and medium enterprises (SMEs), has not been thoroughly studied. This research aims to fill this knowledge gap by leveraging literature on CE, human resource management, innovation, and sustainability to develop and validate a theoretical model examining the relationship between organizational factors (leadership, innovation, culture, and skills) and their impact on the adoption of CE practices to enhance the sustainable performance of SMEs. A survey of 196 SME employees in Indonesia was conducted, with responses analyzed using Structural Equation Modeling. Our findings indicate that organizational leadership facilitates the development of a culture and innovation capabilities to adopt CE practices through a ‘hub and spoke’ strategy, thereby improving sustainable performance among SMEs in Indonesia. We recommend creating knowledge-sharing strategies, collaborative and cooperative CE working groups within and between SMEs, and enhancing information system capabilities to build sustainable business organizations.