From turbulence to transformation: the role of circular economy in shaping sustainable SME growth

Purpose This study aims to explore how circular economy practices (CEPs) impact SME development (SMED) in the context of market turbulence (MT), with sustainable business practices (SBP) acting as a mediating function. This study explores the answers of the following two research questions: (1) To what extent do SBPs act as a mediator between CEP and SMED in the presence of market turbulence? (2) Whether market turbulence with SBPs moderates the relationship between CEP and SMED or not? Design/methodology/approach The study employs a quantitative approach using partial least squares structural equation modeling (PLS-SEM) to analyze the collected data through a survey of 321 SME owners and managers in Lahore, Pakistan. Both measurement and structural models are estimated. Findings The findings of the study manifested that CEPs have a considerable significant impact on SBPs, which in turn positively contribute to SMED. SBPs proved a positive strong partial mediation; however, MT showed “competitive mediation,” which implies that mitigating MT through CEPs may slightly improve SME outcomes; however, it does not fully compensate for the broader implementation of challenges or costs associated with circular economy (CE) adoption. In the case of a moderation effect, SBPs and MT significantly moderate the relationship between CEP, SBP and SMED; however, they exhibit “dampening moderation.” Practical implications The findings advocate that SMEs should adopt sustainability-oriented practices (CEPs) to thrive in volatile environments. Policymakers are encouraged to design targeted interventions, such as resource access and training programs, to strengthen SME resilience and innovation within CE frameworks. Originality/value This study contributes a novel moderated-mediation model that integrates CE theory with SMEs' strategic production behavior under market uncertainties and shocks. It offers empirical evidence, highlighting the conditional effects of MT on the CEP–SMED link, which remained underexplored in existing literature.