Unravelling the role of innovation and institutions in circular economy actions across European small‐ and medium‐sized enterprises

Abstract This study contributes to the literature on the circular economy (CE) and small‐ and medium‐sized enterprises (SMEs) by advancing both theory and empirical evidence on the role of contextual factors. Theoretically, it refines institutional and cultural contingency perspectives by showing that national innovation systems and societal norms do not uniformly enhance the effectiveness of financial support for CE adoption. Instead, these contextual factors shape the impact of public and private financial resources in an asymmetric and selective manner. By jointly considering formal institutions, such as a country's innovation level, and informal institutions, such as social indulgence, the study offers a more nuanced framework to explain cross‐country variation in SMEs' engagement with CE practices. Empirically, the study analyses Flash Eurobarometer data from 26 European Union countries collected in 2015, 2017 and 2021. The results indicate that greater public and private financial support is associated with higher levels of CE engagement among SMEs. In addition, the findings reveal that national innovation levels positively moderate the relationship between public financial support and CE actions, whereas social indulgence negatively moderates the relationship between public support and CE development. Overall, the study provides comparative evidence highlighting the importance of tailoring financial support policies to national institutional and cultural contexts.