The integration of circular economy and digital transformation as a catalyst for small and medium enterprise innovation

Abstract This study examines the integration of digital and circular economy (CE) strategies in small and medium enterprises (SMEs) and their impact on innovation. The research uses data from the Eurobarometer survey conducted by the European Commission, which includes a sample of 16,365 SMEs. Using a combination of regression analysis and machine learning tools, the results indicate that a high degree of digitalisation within SMEs enhances the integration of a CE orientation. However, it is not necessary for SMEs with advanced CE orientations to have high levels of digitalisation. Additionally, the study finds variability in the integration of digital and CE orientations among SMEs, identifying four distinct groups of companies with differing levels of compatibility. Moreover, SMEs that successfully integrate both digital and CE orientations are more likely to innovate, whereas those with poor integration exhibit a lower probability of innovation. These findings offer crucial insights for managers and policymakers aiming to bolster SME innovation, digitalisation and sustainability. The research underscores the need for a balanced integration of digital and CE orientations to enhance innovation and environmental impact in SMEs.