The Mediating Role of Circular Economy in the Relationship Between Industry 4.0 and Sustainable Performance in the Manufacturing Industry

ABSTRACT Strong social pressure coupled with a tightening of environmental policies is forcing manufacturing firms to implement improvements in their production processes to reduce industrial waste and their negative impacts on the environment. To achieve this goal, manufacturing firms are increasingly adopting and applying Industry 4.0 (I4.0) and circular economy ( CE ) practices. However, the literature indicates that the implementation of I4.0 and CE does not always lead to a substantial improvement in the sustainable performance (SP) of manufacturing firms. Hence, this research analyzes how the concurrent adoption of I4.0 and CE impacts the SP of manufacturing firms within the context of Mexico. A research model was developed and validated with a sample of 338 manufacturing companies and by using PLS‐SEM for its analysis and measured I4.0 with 8 items (e.g., systems that integrate the physical world with virtual computational space and interconnecting of small computing devices embedded in products and objects to the internet, enabling the ability to receive and send data), CE with eight items (e.g., there is an environmental commitment by senior management, and there is support for environmental management by midlevel managers) and SP with seven items (e.g., the company's activities enable the transition to a low‐carbon economy, and the company's activities protect and/or restore the environment by focusing on environmental quality aspects and improving resource efficiency) in a research model that proposes four hypotheses that relate the analyzed constructs. The findings reveal that the SP of manufacturing firms increases substantially with the implementation of both Industry 4.0 and CE . Additionally, the results show that the CE plays a mediating role in the relationship between Industry 4.0 and SP. This study theoretically contributes by providing further empirical evidence that demonstrates the connection between I4.0 and CE as well as the mediating effect that CE exerts on the relationship between I4.0 and SP in manufacturing firms. From a practical standpoint, this study contributes by providing manufacturing companies with a better understanding of these relationships, which will help them formulate more effective policies and strategies to support the improvement of their environmental sustainability performance.