Examining the Relationships between Circular Economy Implementation and four Dimensions of Firm Performance

This study builds on firm performance and Circular Economy (CE) research to investigate the relationship between firms’ CE implementation and four dimensions of firm performance, i.e., financial performance, competitiveness, environmental performance, and corporate reputation. We base our hypotheses on sustainability management and firm performance literature and previously validated scales to build a structural path model that examines the relationships between CE implementation and the respective four performance dimensions. We conducted a survey involving 177 respondents from manufacturing and construction companies operating in Germany and analyzed the data with partial least squares structural equation modeling (PLS-SEM). The results of our study confirm a positive relationship between CE implementation and all four dimensions of firm performance. Moreover, we apply advanced quantitative data analysis methods and show that the model has high out-of-sample predictive power. With our study, we explain that the implementation of activities enabling a CE, such as reducing. reinventing, rethinking, restoring, and recirculating, can be an important factor of sustained competitive advantage – especially in the construction and manufacturing industries. These results underline that CE implementation and firm performance are not contradicting each other, but instead can go hand in hand. One of the major contributions of our study is that we build on performance measurement literature to empirically prove the importance of assessing different individual dimensions of firm performance when examining the relationship between CE implementation and firm performance rather than looking at overall firm performance. For practitioners, our study thereby develops and offers empirical evidence for developing CE implementation strategies.