Increasing Circular Practices to Achieve Competitive and Financial Outcomes Among SMEs in the Sustainability Age

This study assesses the financial sustainability (FS) of small and medium-sized enterprises (SMEs) in the Malaysian context and explores the possibility of the use of CE as a tool to bridge the financial sustainability gap between national sustainability goals and financial realities for SMEs. The paper is based on Circular Economy (CE) theory and is contextualized by Resource Dependency Theory (RDT) and discusses how the processes of environmental scanning (ES), resource recycling (RR) and integration into the circular resource chain (CRC) affect FS, which is mediated by green innovation (GI) and moderated by competitive advantage (CA). In this study, PLS-SEM analysis of 309 manufacturing and service sector SMEs found that ES, RR, and CRC had significant effects on GI, explaining 55.2% of the variance. The results indicate that CA positively moderates the ES → GI relationship, while negatively moderating the RR → GI and CRC → GI relationships. This unanticipated phenomenon is referred to as ‘success-induced rigidity’: the more competitive firms can ease up and invest less in improving their operational circularity. The results confirmed the three moderation hypotheses (H11-H13), including the H11 and H13 negative moderation results. Overall, financial stability, which is positively influenced by green innovation, significantly mediates the relationship between ES and FS and between CRC and FS (H8–H10). The model has good explanatory power and predictive power (R² = 66.6% and Q² = 0.627 for FS). The research is valuable because it treats financial stability as a business outcome for SMEs, covers RDT and CE theory, and treats competitive advantage as a counterintuitive moderating variable. The results show that (in the real world) green innovation is needed in the sector and that some policy support is required to support and facilitate SMEs’ circular transitions.