In today’s age of industrialization and globalization, environmental deterioration and overuse of natural resources are identified as bottlenecks of social and economic development worldwide. To address these issues, a circular economy has been used by China as its national environmental strategy. The circular economy emphasizes 1) reducing resource and energy use, 2) reusing materials and items, and 3) recycling wastes and used products. Practically, China implements a circular economy at three different levels: regions, industrial parks, and companies.
While adequate research has been done at the regional and industrial-park levels, how companies participate in a circular economy is not well understood. To fill this research gap, this study examines the following research questions: 1) What are the mechanisms that enable companies to develop their circular economy capability? 2) What are the antecedents of these mechanisms? 3) Does the development of circular economy capability lead to improvements of environmental and business performances?
To address these questions, this research presents a conceptual framework based on complexity theory, natural resource based view (NRBV), dynamic capability theory, absorptive capacity theory, and ecological modernization theory. In particular, product stewardship and green supply chain design are proposed as the key mechanisms through which companies build their circular economy capability. External contextual dynamism for environmental implementation, potential absorptive capacity, and environmental orientation are proposed as antecedents of these mechanisms. Companies’ environmental and business performances are proposed as the outcomes of their circular economy capability.
To test this research model, measurement instruments were developed and validated for eight major constructs and 28 sub-constructs. Then, the research model was tested using Structural Equation Modeling (SEM) based on data collected from a large-scale survey of 293 Chinese manufacturing companies.
This research makes valuable contributions. Theoretically, this research proposes and tests a model that investigates circular economy implementation; develops valid and reliable measurement instruments; and provides a conceptual foundation for future research. Practically, this research can help companies, especially the Chinese manufacturers improve their environmental operations and eventually achieve a synergy between environmental and business performances.