From knowing to transforming: how knowledge-driven capabilities orchestrate circular business model innovation

Manufacturing SMEs are now under sharper pressure than ever to retool their operations and value architectures around circular principles. However, limited attention has been given to how knowledge-driven capabilities enable firms to translate knowledge into circular innovation and business model transformation. Drawing on dynamic capabilities’ theory and the knowledge-based view, the study conceptualises adaptive knowledge sensing capability, opportunity-oriented knowledge integration capability, and dynamic knowledge reconfiguration capability as key antecedents of innovation-oriented knowledge utilisation capability. In turn, knowledge utilisation is proposed to enhance circular eco-innovation, which drives circular business model innovation. Furthermore, circular economy thinking is introduced as a moderating condition that strengthens the relationship between circular eco-innovation and business model innovation. To test the proposed model, a time-lagged research design was employed using data collected from 331 manufacturing SMEs in Shandong Province, China, across three waves. The findings reveal that the three knowledge-driven dynamic capabilities, adaptive knowledge sensing capability, opportunity-oriented knowledge integration capability, and dynamic knowledge reconfiguration capability, each significantly and positively influence innovation-oriented knowledge utilisation capability. In addition, knowledge utilisation capability positively affects circular eco-innovation, which, in turn, has a significant positive impact on circular business model innovation. The results also confirm that circular economy thinking positively moderates the relationship between circular eco-innovation and business model innovation, such that the relationship becomes stronger at higher levels of circular economy thinking. This study contributes to the literature by integrating dynamic capabilities theory and the knowledge-based view to explain how knowledge-based capabilities are translated into circular innovation outcomes.