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Article

Unveiling the Complex Relationship between Open Circular Innovation and Business Circularity: The Role of Circular-Based Dynamic Capabilities and Circular Ambidexterity

by
Noor Ul Hadi
Department of Human Resource Management, College of Business Administration, Prince Mohammad Bin Fahd University, Al-Khobar 31952, Saudi Arabia
Sustainability 2024, 16(17), 7647; https://doi.org/10.3390/su16177647
Submission received: 18 August 2024 / Revised: 23 August 2024 / Accepted: 29 August 2024 / Published: 3 September 2024
(This article belongs to the Special Issue Circular Economy and Sustainable Business Models: New Knowledge, New Rules)
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Abstract

:
Following calls for more research on the circular economy and open innovation, this study sheds light on the scant mechanisms influencing the relationship between open circular innovation and business circularity. This study theorizes that achieving business circularity requires a radical shift, and those circular exploitative activities may not be an effective strategy for this transition. Therefore, circular-based dynamic capabilities and circular ambidexterity are proposed as moderated-mediation mechanisms that explain the relationship between open circular innovation and business circularity. This study employs a quantitative approach to examine the hypothesized relationships. Data were purposively collected from owners and managers of marble manufacturing units due to the significant amount of waste generated by these units. A total of 292 valid responses were analyzed using SmartPLS version 4.1.0.5. The results revealed that the combined effect of open circular innovation and circular-based dynamic capabilities stimulates circular ambidexterity, which in turn leads to business circularity. This signifies that the complementary role of circular ambidexterity and circular-based dynamic capabilities foster the implementation of business circularity. This study empirically confirmed the application of three frameworks into a single new structure called the circular resource-based view, which has been neglected in previous literature. This study concluded that an organization’s circular resources, capabilities, and competencies, when combined harmoniously with circular strategies, could lead to business circularity.

1. Introduction

Despite being conceptually fragmented [1,2,3], research on the circular economy business model is rapidly emerging [4,5] (p. 1). The circular economy is defined as “an economic system that replaces the ‘end-of-life’ concept with reducing, alternatively reusing, recycling, and recovering materials in production/distribution and consumption processes” [6,7] (p. 229). Additionally, it is described as “an economic model designed to substitute the take-make-dispose economy with a regenerative system” [5]. Concisely, generating more sustainable value by circulating limited resources for a long lifetime is termed the circular economy (CE). The main objective of CE is to transform the traditional “take”, “make”, and “dispose” model into a newly-circular business model emphasizing “reuse”, “remanufacture”, and “recycle” [8] (p. 488). Organizations that follow circular business practices often achieve notable success. For instance, the Patagonia “buy less” campaign, emphasizing circularity and sustainability, increased their sales by 30% [9,10]. Similarly, PUMA’s “INCYCLE” strategy and Renault’s strategy of remanufacturing and reusing mechanical and electronic components have also enhanced their profitability [8]. Indeed, there is a strong relationship between the implementation of circular initiatives and profitability [11,12,13]. This aligns with the core concept of the resource-based view [14], which posits that organizations that develop unique competencies can achieve sustainable competitive advantages [15].
However, adopting business circularity in an environment characterized by dynamism can be challenging for organizations, as various internal and external factors can impede the implementation of circular initiatives. Consequently, the adoption of circular principles remains embryonic, with few studies analyzing the human aspects within organizations that hinder the adoption of circular principles. To embrace business circularity, the author argues that new knowledge and technologies are required, thereby warranting further investigation into open innovation [16,17,18,19,20,21,22]. According to Bogers et al. [23], open innovation could be a valuable tool for driving the transition to a circular economy. It can be argued that openness to innovation or collaboration with various stakeholders for the purpose of circularity, referred to as “open circular innovation”, could be a viable strategy for the implementation of circular initiatives in business organizations. For example, sharing knowledge, technologies, and other resources with key stakeholders opens new avenues for “reusing”, “remanufacturing”, and “recycling”. This aligns with [16] (p. 69), who stated that open innovation has the capability to close the loop of product life cycles, thereby driving the transition to circular economy business models. Moreover, open circular innovation enhances positive environmental effects and reduces negative environmental externalities [8,17]. Indeed, open circular innovation is positively related to business circularity. However, in practice, this relationship is more complex. Therefore, to advance the knowledge on open circular innovation and business circularity, this study will shed more light on the following question: “How does open circular innovation enable business circularity?”
To adhere to business circularity within the open circular innovation paradigm, this study proposes that an appropriate circular strategy is required, one that is contingent upon circular ambidexterity and circular-based dynamic capabilities. Circular ambidexterity is defined as an organization’s ability to balance circular explorative and circular exploitative activities. This study infers that enabling circular business models necessitates a significant transformation of existing product(s) and that circular incremental or exploitative activities alone may not suffice for this transition [18] (p. 3687). In other words, exploitative circular activities are necessary but not sufficient for circular product development, as such development requires eco-design, sustainable product design [24] (p. 6), or entirely a new architecture. For this to occur, it is essential for organizations to achieve an efficient equilibrium between circular exploitative and circular explorative activities. This aligns with [25] (p. 4), who stated that organizations need to engage in explorative activities for circular product design, while for incremental activities, they need to engage in exploitative activities. In this context, circular ambidexterity serves as a mediating mechanism to explain the relationship between open circular innovation and business circularity.
From the perspective of dynamic capabilities [26,27], this study further posits that circular-based dynamic capabilities and circular ambidexterity could function as a moderated-mediation mechanism between open circular innovation and business circularity. Circular-based dynamic capabilities refer to the integration of the circular economy business model into a dynamic capability framework [26]. For instance, an organization’s circular-based sensing capability identifies circular gaps [e.g., circular product(s)], and knowledge about these gaps is collected in a timely manner via inbound open circular innovation. Additionally, organizations with circular-based reconfiguration capabilities recombine the new internal and external circular knowledge into their system, thereby enabling them to maintain a balance between circular explorative and circular exploitative activities. Thus, open circular innovation and circular-based dynamic capabilities together influence circular ambidexterity and business circularity. This phenomenon has not yet been studied in literature but can be understood through the lens of strategic management, thereby warranting a strategic view.
This study contributes to the literature in several ways; First, it elucidates the relationship between open circular innovation and business circularity, addressing calls for more research on open innovation and the circular economy [21,23,28,29,30,31,32,33,34,35]. Secondly, previous studies (e.g., [16,20,34,36,37,38,39]) have established open innovation as a source for adopting circular economy business models. However, empirical evidence of circular ambidexterity as a mediating mechanism in the relationship between open circular innovation and business circularity remains lacking. Establishing this relationship is crucial, as exploitative activities alone may not suffice for the significant transformation of existing products to circular products. Thirdly, this study contributes to the unexplored moderated-mediation relationship between open circular innovation and business circularity. It posits that open circular innovation is necessary but not sufficient for this transition, as circular ambidexterity and circular economy business models will only be realized if organizations with knowledge-acquiring capabilities possess strong circular-based-dynamic capabilities to process the influx. Additionally, this study integrates three frameworks into a single new structure to confirm its applicability in business circularity. Furthermore, it addresses the lack of research in the context of marble manufacturing. The marble manufacturing context is a significant consideration in business circularity literature, as a considerable quantity of waste is associated with the marble extraction and processing cycle [40].

2. Literature Review

2.1. Theoretical Background

Since the traditional resource-based view [14] overlooks environmental dynamism in the knowledge-based economy [15] (p. 156), this study integrates three frameworks—open innovation, dynamic capabilities, and organizational ambidexterity—into a single new structure based on the traditional resource-based view. The argument is that organizations can establish unique circular-based resources, capabilities, and competencies, leading to business circularity [41] (p. 78). Thus, business circularity is a function of firm circular resources, circular capabilities, and circular competencies, collectively termed the firm’s circular-based view. Continuing on this line, it is argued that open circular innovation and circular-based dynamic capabilities influence circular exploitative and circular explorative activities, which in turn lead to business circularity. Consequently, when an organization’s circular resources, capabilities, and competencies are harmoniously aligned with circular strategies, they can achieve business circularity. With this logic in mind, the theoretical background of this study is rooted in a circular resource-based view.

2.2. Circular Open Innovation and Business Circularity

Given that the implementation of circular business initiatives is rooted in both intraorganizational and interorganizational activities, open circular innovation is a crucial consideration for driving the transition to business circularity [24,28,34,36,42,43] (p. 2). Open circular innovation refers to a firm’s ability to acquire circular process and product knowledge from a diversity of external sources via inbound circular innovation and provide circular product and process knowledge via outbound circular innovation to potential beneficiaries [19,22,44]. In this manner, circular process and product knowledge beyond the capacity of acquiring organizations is obtained, thereby intensifying the circular innovation capacity of acquiring organizations and positively influencing the adoption of circularity. Similarly, the circular knowledge generated by the acquired organization can be transferred or sold to potential beneficiaries to promote and develop the sector [16,39] (p. 67). For instance, the waste and resources of different collaborators can circulate continuously through open circular innovation (i.e., the waste of one company can be input for another). Thus, open circular innovation is a strategic tool for the efficient consumption of limited resources and a valuable tool for circularity. This aligns with Brown et al. [24,34], (p. 2) who posited that “sustainable product design” may not be possible in isolation; therefore, “eco-design” or “sustainable product design” can be done at the system level through interorganizational and intraorganizational activities. According to Chen and Liu [45] (p. 3), open innovation has the ability to stimulate entirely new architectures. From the above discussion, it can be derived that organizations sharing their resources at multiple levels could reduce negative environmental externalities and enhance positive environmental effects. Examples include reducing disposal to minimize waste and energy, reusing items to prolong the useful life of products, and recycling materials to keep them in the value chain for a longer time. To bridge the gap between open circular innovation and business circularity, this study hypothesizes the following:
H1: 
There is a positive and significant relationship between open circular innovation and business circularity.

2.3. Open Circular Innovation, Circular Ambidexterity, and Business Circularity

The relationship between open circular innovation and business circularity is indirect and has yet to be thoroughly explored in the open circular innovation literature [16,21,36]. This is because circular economy business models require a significant transformation of existing products, and while open circular innovation is necessary, it is not sufficient for achieving business circularity. This study therefore argues that open circular innovation opens new avenues for circular innovations, which in turn leads to business circularity. Thus, circular innovation is the underlying mechanism that explains the relationship between open circular innovation and business circularity [25]. However, it is further argued that incremental or exploitative activities alone may not suffice for this transition, but organizations need to reach an efficient equilibrium between circular exploitative and circular explorative activities. An adequate and efficient balance between these activities is essential because “the exploration of new functions requires the application of existing systems” [25,46,47] (p. 865).
The acquisition of new circular knowledge from inbound open circular innovation results in circular disruption via circular explorative activities, as circular exploration helps firms create and internalize breakthrough knowledge. Concurrently, outbound open circular innovation results in circular exploitative activities supporting firms in expanding and renewing their existing knowledge. Circular exploitative activities also help firms to transfer their obsolete knowledge to potential beneficiaries (externalization). Thus, internalizing circular knowledge through purchasing and externalizing circular knowledge out-licensing is an effective circular strategy for expediting circular ambidexterity [48]. Circular ambidexterity can, therefore, occur within an open circular innovation system. Additionally, from the lens of strategic management perspective, business circularity demands circular ambidexterity, as it enables firms to meet the changing demands of their environment. Circular ambidexterity replaces the linear model of “take”, “make”, and “disposal” with a newly-circular business model of “reuse”, “remanufacture” and “recycle”, thereby positively impacting business circularity. This study thus argues that firms exhibiting circular ambidexterity are more likely to achieve business circularity. Katou et al. [25] (p. 4) also propose that organizations need to engage in explorative activities for the design of circular products. However, the literature on circular open innovation, circular ambidexterity, and business circularity is still in the embryonic phase [49] (p. 5810), warranting further scholarly attention. Therefore, from the circular resource-based view, the following hypothesis is developed.
H2: 
Circular ambidexterity mediates the relationship between open circular innovation and business circularity.

2.4. Moderated-Mediation of Circular-Based Dynamic Capabilities and Circular Ambidexterity

Although recent studies have intensely debated the influence of organizational factors on the adoption of circular economy business models, Soni et al. [50], proposed adaptive distributive leadership, ethical leadership, and a management control system [29]; Kisi [51] proposed collaborative leadership; and others proposed leadership, innovation, culture, and competencies [52,53], ambidextrous leadership and organizational ambidexterity [25], dynamic capabilities [54,55,56], eco-innovation [18,24,57], entrepreneurship [58], social entrepreneurship [59,60], circular supply chains [49,61,62], and green human resource management [63]. However, much uncertainty still exists about how circular open innovation facilitates business circularity. To address this research gap and advance the discussion on how open circular innovation can drive business circularity, this study explores the unexplored moderated-mediation role of circular-based dynamic capabilities and circular ambidexterity in the relationship between open circular innovation and business circularity.
Circular-based dynamic capabilities are the ability of an organization to scan, search, and absorb circular business practices, respond to circular business opportunities, and adapt circular economy business principles. This study posits that circular-based dynamic capabilities enable organizations to integrate and reconfigure internal and external knowledge, as dynamic capabilities transform open circular innovation strategies into practices. In other words, organizations pursuing open circular innovation strategies need to restructure their current business models. Dynamic capabilities help organizations maintain alignment with a readily changing environment and can assist firms in fully realizing the benefits of open innovation [23] (p. 84). Consequently, learning from open circular innovation is only effective if the acquiring organization has strong circular-based dynamic capabilities.
According to De Aro and Perez [64] (p. 126), dynamic capabilities are crucial for the strategic management of internal and external knowledge. The combined effect of open circular innovation and circular-based dynamic capabilities stimulates circular ambidexterity, as a broader circular knowledge base and circular-based dynamic capabilities provide organizations with multiple options for supporting the concurrent development of circular exploration and circular exploitation activities. According to Li et al. [65] (p. 257) and Zahoor et al. [66] (p. 84), new knowledge and strategic alliances are key sources of organizational ambidexterity. Clarifying the relationship between dynamic capabilities, open innovation, and organizational ambidexterity, scholars have found that these constructs are closely related [47,54,67,68,69] (pp. 160, 440). It can be argued that the concept of business circularity is incomplete without open circular innovation, circular-based dynamic capabilities, and circular ambidexterity. Katou et al. [25] contend that for the successful attainment of a circular economy, organizational ambidexterity is a viable strategy. They further assert that a commitment to exploration and exploitation is compatible with the circular economy business model. Balancing circular explorative and circular exploitative activities facilitates circular economy production processes, thereby improving business circularity. Moreover, maintaining equilibrium between circular exploration and circular exploitation activities requires timely structural alignment, further necessitating circular-based dynamic capabilities (see Figure 1). To better clarify these relationships, the following hypotheses are developed:
H3a: 
Circular-based dynamic capabilities moderate the relationship between open circular innovation and circular ambidexterity.
H3b: 
Circular-based dynamic capabilities moderate the relationship between circular ambidexterity and business circularity.
H3c: 
Circular-based dynamic capabilities moderate the mediated relationship between open circular innovation, circular ambidexterity, and business circularity.

3. Methodology

3.1. Research Context, Sampling, and Data Collection

An explanatory research design was employed to test the hypothesized relationships in marble manufacturing units in the province of Khyber Pakhtunkhwa (KP), Pakistan. This context is relevant for several reasons. Firstly, a considerable quantity of waste is associated with marble extraction and processing [40,70]. For instance, waste arises from stone extraction, slab cutting, marble cutting, and marble polishing. According to Cobo-Ceacero et al. [71], circular economy business models could potentially address the problem of marble waste, as waste from marble can be used in other sectors to reduce environmental impacts [72]. Secondly, the recycling of marble waste can be an excellent alternative in the production of lightweight, eco-friendly bricks [71] (p. 35409). Thirdly, there are an estimated three hundred billion tons of marble and onyx reserves in Pakistan, with 78% located in KP [73], which has 601 processing units. Fourthly, marble manufacturing is a key target for the Small Medium Enterprise Development Authority (SMEDA) [74] circular ambition. Additionally, the Pakistani context is relatively understudied in the business circularity literature.
Survey-based research strategies and questionnaire-based data collection techniques have been used in the current study. Self-administered questionnaires with instructions were sent to the respondents. Data were purposively collected from the owners and managers of marble manufacturing units at single point in time. This study only considered those marble manufacturing units whose priority was circular economy business model adoption. Out of 601 processing units, owners and managers of 331 units agreed to participate in this study. A total of 331 respondents completed the survey (March–June 2024) with a response rate of 55%. A total of 70% of the respondents were owners, and 30% were managers; with respect to gender, marble manufacturing industry is male-dominated. In marble manufacturing units, around 54% of respondents were graduates and 30% were masters; hence, their ability to understand and answer the questions was unquestionable. Majority of the managers had 5 years of experience or more. During the data screening phase, 39 responses were discarded due to missing values and straight-lining effects, yielding a valid dataset of 292 responses. These valid responses were analyzed using SmartPLS version 4.1.0.5 [75]. Since the main purpose of this study was predicting business circularity, the hypothesized structural model was tested through SmartPLS-4. PLS-SEM also achieves high levels of statistical power with small sample sizes and handles complex models [76].

3.2. Measurement Instruments

All items used in the current study were adapted from previous research. Business circularity was measured using scales developed by Katou et al. [25,29,53] (pp. 12, 373). Respondents were asked, on a five-point Likert scale, to what extent their units engaged in activities such as “selecting raw materials carefully”, “designing products following ecological standards”, and “recycling products and wastes generated from operations”. The scale used to measure open circular innovation was adapted from [25] and comprised two dimensions: outbound circular innovation and inbound circular innovation, with a total of six items. Examples include “our manufacturing unit establishes a high number of outside partners for the inflow of circular knowledge”, “our manufacturing unit is transparent in joint circular efforts with partners”, and “our manufacturing unit shares circular knowledge with potential beneficiaries.” Similarly, the scale used to measure circular ambidexterity was adapted from [25]. It comprised two dimensions: exploitative circular activities and explorative circular activities, with six items. Examples include “our manufacturing unit generates new circular ideas to meet the requirement of the circular business model”, “our manufacturing unit focuses on circular radical activities to meet the requirement of the circular business model”, and “our manufacturing unit considers the importance of efficiency to meet the requirement of the circular business model.” Modifications were made to suit this study context where necessary. Circular-based dynamic capabilities were measured with six items adapted from Khan et al. [77] (p. 505) and Loureiro et al. [78], e.g., “our manufacturing unit has the ability to quickly identify circular changes in the external market”, “our manufacturing unit has the ability to integrate circular market knowledge”, and “our manufacturing unit has the ability to quickly update and adjust existing circular knowledge to meet market demand”, among other items (for details, visit Appendix B, Table A1).

4. Analysis and Results

4.1. Reliability and Validity of Scales

The reliability and construct validity of all constructs were tested through a series of empirical analyses. Firstly, Harman’s single factor for common method bias (CMB) was conducted. The results revealed four factors, with one factor explaining 37% of the variance, signifying no evidence of CMB in the dataset [79]. Further, the overall results of the measurement models revealed a good fit; all the values of Cronbach’s alpha and composite reliabilities were not lower than the minimum threshold of 0.70 [75] and ranged between 0.895 and 0.951, indicating the internal consistency of scales. The convergent validity of all constructs was confirmed through average variance extracted (AVE), and all the values of AVE ranged from 0.663 to 0.837, supporting an acceptable level of convergent validity. The factor loadings of four items were found to be less than 0.70 (e.g., CB_AMB1 = 0.636, CB_AMB3 = 0.607, CB_DC2 = 0.679, and CB_OI2 = 0.608); however, these items were kept in the estimation because their values did not negatively affect the reliability and validity of the constructs (see Table 1).
Table 2 shows an overview of discriminant validity. As can be seen from the table, the values of the HTMT ratio for the four constructs are below 0.85, ensuring that all the constructs are distinct from other constructs in the model [80].

4.2. Hypothesis Testing

The results of the model are presented in Table 3, Figure 2. The path originating from open circular innovation to business circularity claims that open circular innovation triggers business circularity (H1). The study findings support this hypothesis (β = 0.395, t ≥ 1.96, and p ≤ 0.05 with a lower limit of 0.345 and an upper limit of 0.453) and suggest that collaboration among various stakeholders for circularity is a viable strategy for business circularity. Regarding the mediational Hypothesis 2, this study found that the direct relationship between open circular innovation and circular ambidexterity is positive and significant (β = 0.450, t ≥ 1.96, and p ≤ 0.05), and the direct relationship between circular ambidexterity and business circularity is also positive and significant (β = 0.429, t ≥1.96, and p ≤ 0.05), as shown in Table 3. The result of the indirect effect also revealed that circular ambidexterity does mediate the relationship between open circular innovation and business circularity (β = 0.193, t ≥ 1.96, and p ≤ 0.05 with a lower limit of 0.150 and an upper limit of 0.244); thus, H2 is supported. The standardized estimates of path analysis can be seen in Figure 2.
With regard to hypotheses H3a–H3c, the importance of circular-based dynamic capabilities can be understood from the results. Circular-based dynamic capabilities magnify the relationship between open circular innovation and circular ambidexterity (β = 0.054, t ≥ 1.96, and p ≤ 0.05 with a lower limit of 0.005 and an upper limit of 0.102); as a consequence, H3a is supported. Similarly, for continuous structural alignment in environmental uncertainty, this study further posits that the relationship between circular ambidexterity and business circularity is moderated by circular-based dynamic capabilities; the results of this study provide enough evidence to support H3b (e.g., β = 0.072, t ≥ 1.96, and p ≤ 0.05 with a lower limit of 0.038 and an upper limit of 0.114). See Table 3 below.
Table 4 shows an overview of specific indirect effects. As can be seen from the table, the result of the indirect effect, i.e., moderated-mediation (H3c), is interesting because the moderated-mediation path CB_DC × CB_OI → CB_AMB → BC yielded a satisfactory result (β = 0.023, t ≥ 1.96, and p ≤ 0.05 with a lower limit of 0.002 and an upper limit of 0.043). This study can safely conclude that circular ambidexterity and circular-based dynamic capabilities are moderated-mediated mechanisms and can clearly explain the relationship between open circular innovation and business circularity (for slope analysis, visit Appendix A, Figure A1 and A2). This finding highlights the importance of strategic management for business circularity.

5. Discussion

Although several studies have been conducted on interorganizational and intraorganizational collaborations and the circular economy (e.g., [16,20,28,34,36,39]), these studies have not been able to convincingly offer an adequate empirical explanation of how open circular innovation enables business circularity. From a strategic management perspective, the present study thus sheds more light on the relationship between open circular innovation and business circularity, supported by empirical evidence. The result regarding H1, which proposes a positive and significant relationship between open circular innovation and business circularity, was empirically supported. This result is consistent with recent descriptive, conceptual, and exploratory case studies (e.g., [20,28,34,36]) that have proposed a relationship between open innovation and the circular economy. However, the findings about Hypothesis 1 in the current study are different in the sense that this study responded to recent calls on “Circular Economy and Sustainable Business Models” and provided empirical evidence specifically on open circular innovation and business circularity. The results regarding H1 are conclusive, but this relationship in practice is more complex, as open circular innovation itself is not innovation but an innovation management strategy, and business circularity requires radical shifts and significant transformation [24] (p. 6). In this sense, circular ambidexterity has been identified as one of the major factors that clearly explain the relationship between open circular innovation and business circularity.
The findings of this study fully support the inclusion of circular ambidexterity as a mediator and propose that an efficient equilibrium between circular exploitative and circular explorative activities is critical for business circularity; thus, H2 was confirmed. Organizational ambidexterity has been used in several studies as an independent variable [47,65,67], mediating [25,69] for organizational performance. However, to the best of the author’s knowledge, circular ambidexterity is an important construct for business circularity and has not yet been explored in business circularity literature. In this way, the mediational role of circular ambidexterity in the relationship between open circular innovation and business circularity enriches the literature on strategic management and the circular economy business model, which, according to Leitão et al. [46] (p. 231), needs scholarly attention. Furthermore, H3a, regarding the moderating role of circular-based dynamic capabilities on the relationship between open circular innovation and circular ambidexterity, was empirically supported. These findings suggest that marble manufacturing units must have the ability to translate, assimilate, and embed the acquired knowledge into their system; thus, circular dynamic capabilities and open circular innovation reinforce one another, and the complementary effect of open circular innovation and circular-based dynamic capabilities not only influences exploitative circular activities but also stimulates explorative circular activities, thereby positively leading to circular ambidexterity. The results regarding H3a agree with the findings of [26,64] (p. 116), who hinted that strong dynamic capabilities and open innovation support one another and allow effective practices of organizational ambidexterity [67,69].
Dynamic capabilities facilitate organizational adaptation to changes and ensure alignment with the volatile business environment. Conversely, organizational ambidexterity refers to an organization’s capacity to simultaneously engage in explorative and exploitative activities [79,81]. In light of these concepts, H3b hypothesized that circular-based dynamic capabilities moderate the relationship between circular ambidexterity and business circularity. The findings affirm that circular ambidexterity in environmental conditions is supported by circular-based dynamic capabilities. The complementary interaction between circular ambidexterity and circular-based dynamic capabilities enhances the adoption of business circularity, thereby supporting H3b. These findings align with previous research [69] (p. 440), which has demonstrated a close relationship between dynamic capabilities and organizational ambidexterity. This study contributes novelty by examining the dual role of circular-based dynamic capabilities in business circularity, an area that has not been extensively explored in the existing literature.
H3c explores the moderated-mediation role of circular-based dynamic capabilities and circular ambidexterity in the relationship between open circular innovation and business circularity. The findings unveil the mechanisms through which circular-based dynamic capabilities allow effective practices of open circular innovation, thereby positively influencing both circular ambidexterity and business circularity. A significant revelation from H3c is that the synergistic interplay of open circular innovation and circular-based dynamic capabilities stimulates both exploitative and explorative circular activities (circular ambidexterity), ultimately fostering business circularity. This underscores that while open circular innovation is necessary, it alone is insufficient for achieving business circularity. Therefore, this study proposes that open circular innovation, circular-based dynamic capabilities, and circular ambidexterity collectively constitute pivotal factors driving business circularity. These findings resonate with the foundational principles of the resource-based view [14] and the circular resource-based view introduced in this study, which emphasize that organizations achieve circularity by developing unique circular resources, capabilities, and competencies.

6. Conclusions

While open innovation enhances business circularity by providing new circular knowledge and technologies, this direct link in practice does not seem to be empirically conclusive. Open innovation itself is not innovation but an innovation management strategy that facilitates the inflow and outflow of knowledge, and business circularity requires a significant transformation of existing strategies, resources, and practices. In this context, this study introduces circular ambidexterity into the relationship between open circular innovation and business circularity. The results support the inclusion of circular ambidexterity. However, to translate circular knowledge into circular explorative and exploitative practices, this study considered the conditional role of circular-based dynamic capabilities. The results confirm that open circular innovation combined with circular-based dynamic capabilities fosters circular exploitative and explorative activities. Furthermore, circular-based dynamic capabilities combined with circular ambidexterity yield the most effective circular business model. These findings empirically support the argument that open circular innovation enables circular ambidexterity and business circularity in the presence of circular-based dynamic capabilities. This study concludes that organizational circular resources are crucial for business circularity. Therefore, the resources and capabilities of marble manufacturing units must be capable of processing waste and closing the loop of product lifecycles.

6.1. Theoretical Implications

In response to the call for more research on open innovation and the circular economy, the present study contributes to the special issue of “Circular Economy and Sustainable Business Models: New Knowledge, New Rules”. The results empirically confirm the integration of three frameworks—open innovation, dynamic capabilities, and organizational ambidexterity—into a single new structure, the circular resource-based view, which has been neglected in previous circular economy business model literature. Furthermore, this study empirically contributes to the organizational ambidexterity framework by explicating the previously missing link between open circular innovation and business circularity. This study shed more light on the unexplored moderated-mediation relationship between open circular innovation and business circularity to make it more complete. The results of this study confirm that circular-based dynamic capabilities transform open circular innovation strategy into practices; the multiplicative effect of open circular innovation and circular-based dynamic capabilities enable circular ambidexterity, which in turn leads to business circularity. By integrating strategic management and circular economy literature, this study explored this novel relationship for the first time. Additionally, the findings of this study also contributed to the United Nations Sustainable Development Goals (UN SDGs).

6.2. Managerial Implications

The results revealed that inter-organizational and intra-organizational collaborations for circular knowledge flows are an initial step in driving the transition to business circularity. Therefore, the owners and managers of marble manufacturing units must cultivate successful collaborations with key stakeholders. The findings suggest that circular-based dynamic capabilities, in conjunction with open circular innovation, are crucial for converting inbound circular knowledge into circular products. Consequently, marble manufacturing units must strengthen their circular-based dynamic capabilities. Furthermore, the results verified that circular incremental activities are necessary but not sufficient for circular product development, as such development requires “eco-design” or a “radical shift”. Therefore, marble manufacturing units must maintain an adequate balance between circular exploitative and circular explorative activities. Strong circular-based dynamic capabilities can enhance the effectiveness of open circular innovation and circular ambidexterity, which in turn leads to business circularity. To achieve business circularity, even in environmental volatility, this study suggests that managers combine the three frameworks, as “the whole is greater than the sum of its parts”.

6.3. Limitation and Direction for Future Research

Although the research design aligns with the hypothesized relationships, this study is not without limitations. This study was conducted in the marble manufacturing units of the Province of Khyber Pakhtunkhwa (KP), and data were purposively collected from these units. Therefore, the findings of this study are limited to marble manufacturing units. A larger sample size, encompassing other manufacturing SMEs, could enhance the generalizability and cross-industry verification of the findings. Therefore, it would be more convincing if scholars could further explore this contextual view. Other potential variables such as ambidextrous leadership, circular ambidexterity, and circular innovation deserve potential consideration in future studies. The results of this study might be affected by common rater bias; however, the result of the common method variance analysis indicated that 37% of the variance is explained by a single factor, which is below the 50% threshold. This study did not consider control variables. Future research could account for potential control variables such as firm size and firm age. Lastly, the findings of this study suggest that circular resources are crucial sources of business circularity. An in-depth analysis of organizational circular resources warrants scholarly attention.

Funding

This research received no external funding.

Institutional Review Board Statement

Not applicable.

Informed Consent Statement

Informed consent was obtained from all subjects involved in this study.

Data Availability Statement

Data will be made available upon formal institutional demand.

Acknowledgments

The efforts made by the data collection team are really acknowledged.

Conflicts of Interest

The author declares no conflicts of interest.

Appendix A

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Figure A1. Slope analysis of circular-based dynamic capabilities and open circular innovation. Source: author’s own compilation.
Figure A1. Slope analysis of circular-based dynamic capabilities and open circular innovation. Source: author’s own compilation.
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Figure A2. Slope analysis of circular-based dynamic capabilities and circular ambidexterity. Source: author’s own compilation.
Figure A2. Slope analysis of circular-based dynamic capabilities and circular ambidexterity. Source: author’s own compilation.
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Appendix B

Table A1. Measurement instruments.
Table A1. Measurement instruments.
Open Circular Innovation (anchored by strongly disagree to strongly agree)
Inbound open circular innovation items“Our manufacturing unit establishes a high number of outside partners for the inflow of circular knowledge”
“Our manufacturing unit is transparent in joint circular efforts with partners”
“Our manufacturing unit follows aggressive participation in circular technology-based alliances”
Outbound open circular innovation“Our manufacturing unit establishes a high number of outside partners for the outflow of circular knowledge”
“Our manufacturing unit shares circular knowledge with potential beneficiaries”
“Our manufacturing unit offers royalty agreements to other partners to better benefit from our eco-innovation efforts”
Circular Ambidexterity (anchored by strongly disagree to strongly agree)
Explorative circular ambidexterity“Our manufacturing unit generates new circular ideas to meet the requirement of circular business model”
“Our manufacturing unit focuses on circular radical activities to meet the requirement of circular business model”
“Our manufacturing unit focuses on completely new circular products to meet the requirement of circular business model”
“Our manufacturing unit opens new distribution channels to meet the requirement of circular business model”
Exploitative circular ambidexterity“Our manufacturing unit’s circular activities focus on the present”
“Our manufacturing unit considers the importance of efficiency to meet the requirement of circular business model”
Circular-based Dynamic Capabilities (anchored by strongly disagree to strongly agree)
Circular-based sensing capability“Our manufacturing unit has the ability to quickly identify circular changes in the external market environment”
“Our manufacturing unit has the ability to integrate circular market knowledge”
Circular-based seizing capability“Our manufacturing unit has the ability to leverage the opportunities with speed and efficiency”
“Our manufacturing unit has the ability to quickly update and adjust existing circular knowledge to meet market demand”
Circular-based reconfiguring capability “Our manufacturing unit has the ability to apply external knowledge for improving components and processes”
“Our manufacturing unit has the ability to extract circular benefits based on current resources and to develop new capabilities”
(anchored by strongly disagree to strongly agree)
Business Circularity“Our manufacturing unit selects raw materials carefully”
“Our manufacturing unit designs products following ecological standards”
“Our manufacturing unit can recycle waste generated from operations”
“Our manufacturing unit has maintenance practices that enhance the life of facilities, machinery, and equipment”
“Our manufacturing unit designs aiming at extending product life”
Source: adapted from [25] (13–15); [29]; [53] (373); [77] (505) ; [78].

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Figure 1. Conceptual Framework. Source: author’s own compilation.
Figure 1. Conceptual Framework. Source: author’s own compilation.
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Figure 2. Tested research model. Source: author’s own compilation.
Figure 2. Tested research model. Source: author’s own compilation.
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Table 1. Reliability and validity of constructs.
Table 1. Reliability and validity of constructs.
Items DescriptionF-Loadings
Open circular innovation (a = 0.895; CR = 0.923; AVE = 0.663)
“Our manufacturing unit establishes a high number of outside partners for the inflow of circular knowledge”0.820
“Our manufacturing unit is transparent in joint circular efforts with partners”0.608
“Our manufacturing unit follows aggressive participation in circular technology-based alliances”0.741
“Our manufacturing unit establishes a high number of outside partners for the outflow of circular knowledge”0.909
“Our manufacturing unit shares circular knowledge with potential beneficiaries”0.841
“Our manufacturing unit offers royalty agreements to other partners to better benefit from our eco-innovation efforts”0.924
Circular ambidexterity (a = 0.901; CR = 0.932; AVE = 0.685)
“Our manufacturing unit generates new circular ideas to meet the requirement of circular business model” 0.636
“Our manufacturing unit focuses on circular radical activities to meet the requirement of circular business model”0.933
“Our manufacturing unit focuses on completely new circular products to meet the requirement of circular business model” 0.607
“Our manufacturing unit open new distribution channels to meet the requirement of circular business model” 0.897
“Our manufacturing unit circular activities focuses on the present”0.940
“Our manufacturing unit considers the importance of efficiency to meet the requirement of circular business model”0.883
Circular-based dynamic capabilities (a = 0.938; CR = 0.952; AVE = 0.771)
“Our manufacturing unit has the ability to quickly identify circular changes in the external market environment”0.954
“Our manufacturing unit has the ability to integrate circular market knowledge” 0.876
“Our manufacturing unit has the ability to leverage the opportunities with speed and efficiency”0.679
“Our manufacturing unit has the ability to quickly update and adjust existing circular knowledge to meet market demand”0.855
“Our manufacturing unit has the ability to apply external knowledge for improving component and processes”0.916
“Our manufacturing unit has the ability to extract circular benefits based on current resources and to develop new capabilities”0.959
Business circularity (a = 0.951; CR = 0.952; AVE = 0.837)
“Our manufacturing unit select raw material carefully”0.900
“Our manufacturing unit design product following ecological standards”0.890
“Our manufacturing unit can recycle wastes generated from operations”0.923
“Our manufacturing unit has maintenance practices that enhances the life of facilities, machineries and equipment”0.930
“Our manufacturing unit designs aiming at extending product life”0.932
Source: adapted from [25] (13–15); [29]; [53] (373); [77] (505) ; [78]. Note. a = Cronbach’s alpha ; CR = Composite reliability; AVE = Average variance extracted.
Table 2. Discriminant validity.
Table 2. Discriminant validity.
ConstructsBusiness CircularityCircular
Ambidexterity		Circular-Based
Dynamic Capabilities		Open Circular Innovation
Business Circularity----
Circular Ambidexterity0.672---
Circular-based Dynamic Capabilities0.5960.761--
Open Circular Innovation0.4320.7150.560-
Source: author’s own compilation.
Table 3. Path coefficients, t-values, and p-values.
Table 3. Path coefficients, t-values, and p-values.
PathsβSTDEVt-Statisticsp-Values2.5%97.5%
CB_AMB → BC0.4290.0479.1420.0010.3320.520
CB_DC → BC0.1570.0354.5330.0010.0890.225
CB_DC → CB_AMB0.5350.03814.950.0010.4600.605
CB_OI → BC0.3950.02714.950.0010.3450.453
CB_OI → CB_AMB0.4500.03214.580.0010.3900.516
CB_DC × CB_OI → CB_AMB0.0540.0252.1330.0320.0050.102
CB_DC × CB_AMB → BC0.0720.0193.7590.0000.0380.114
Source: author’s own compilation.
Table 4. Specific indirect effects and confidence interval.
Table 4. Specific indirect effects and confidence interval.
Indirect PathsβSTDEVt-Statisticsp-Values2.5%97.5%
CB_DC → CB_AMB → BC0.2300.0327.2110.0010.1710.297
CB_OI → CB_AMB → BC0.1930.0248.0430.0010.1500.244
CB_DC × CB_OI → CB_AMB → BC0.0230.0102.2220.0260.0020.043
Source: author’s own compilation.
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Hadi, N.U. Unveiling the Complex Relationship between Open Circular Innovation and Business Circularity: The Role of Circular-Based Dynamic Capabilities and Circular Ambidexterity. Sustainability 2024, 16, 7647. https://doi.org/10.3390/su16177647

AMA Style

Hadi NU. Unveiling the Complex Relationship between Open Circular Innovation and Business Circularity: The Role of Circular-Based Dynamic Capabilities and Circular Ambidexterity. Sustainability. 2024; 16(17):7647. https://doi.org/10.3390/su16177647

Chicago/Turabian Style

Hadi, Noor Ul. 2024. "Unveiling the Complex Relationship between Open Circular Innovation and Business Circularity: The Role of Circular-Based Dynamic Capabilities and Circular Ambidexterity" Sustainability 16, no. 17: 7647. https://doi.org/10.3390/su16177647

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