Bridging Inter‐Organizational Collaboration, Circular Economy Practices, and Firm Performance: The Role of Dynamic Capabilities Within Baltic States

ABSTRACT Despite the growing interest in the circular economy (CE) among various stakeholders, several research gaps continue to challenge researchers and practitioners, specifically among emerging European economies. This study analyzes survey data from 127 manufacturing SMEs in the Baltic states. Using a two‐step approach of structural equation modeling and fuzzy‐set qualitative comparative analysis, we examine how inter‐organizational collaboration affects CE practices, focusing on the mediating role of dynamic capabilities. Consequently, we test the effects of CE practices on organizational sustainable and economic performance. Our contribution lies mainly in the fact that empirical analyses linking these theoretical lenses are rare, precisely among the Baltic states that are experiencing paradoxes in the contradictory development of innovation and green performance, and data scarcity for policymakers. The positive effects of collaboration on CE practices and performance are confirmed, as well as the mediating role of dynamic capabilities. Surprisingly, we provide new evidence that consumer‐driven collaboration can negatively impact dynamic capabilities and CE practices. These findings open a new way to design tailored implications for different stakeholders, involving better external collaboration and flexible resource management on the SMEs' side.