Digital Dynamic Capabilities and Environmental Sustainability: The Role of Circular Supply Chain Practices

ABSTRACT This study explores how digital dynamic capabilities (DDC)—specifically digital absorptive capacity (DAC) and digital transformation capacity (DTC)—contribute to environmental sustainability (ES), both directly and through circular supply chain practices (CSCP). Utilizing dynamic capabilities and resource‐orchestration theories, we collected survey data from 252 Chinese manufacturing firms using a two‐wave design and employed partial least squares structural equation modeling (PLS‐SEM) for hypothesis testing. The results indicate that both DAC and DTC significantly enhance ES, underscoring the strategic importance of digital capabilities in promoting environmentally responsible operations. Open‐loop circular initiatives, such as material efficiency and product redesign, partially mediate these effects, suggesting that digitally enabled circular practices bolster sustainability performance. In contrast, closed‐loop initiatives—such as recovery and remanufacturing—did not significantly mediate the relationship between DDC and ES. These findings deepen our understanding of how digitalization fosters circularity and provide practical insights for firms aiming to integrate digital capabilities with circular economy strategies for long‐term environmental benefits.