Circular Economy Implementation: A Paradox–Dynamic Capabilities Perspective Under Institutional Pressures

ABSTRACT Why do firms facing similar sustainability pressures differ substantially in circular economy implementation? Existing research provides limited insight into how institutional pressures are internally interpreted and translated into organizational action. Drawing on institutional theory, paradox theory, and the dynamic capabilities perspective, this study develops and tests a multilevel model explaining how institutional pressures shape circular economy implementation through managerial cognition and organizational capabilities. Using survey data from 312 managers across European firms, the findings reveal that institutional pressures positively influence paradox mindset, dynamic capabilities, and circular economy implementation. However, paradox mindset does not directly translate into implementation; instead, its effect operates indirectly through dynamic capabilities. These findings suggest that institutional pressures alone do not explain variation in circular economy implementation across firms. The study advances a microfoundational and process‐oriented explanation of circular economy implementation and offers insights into how firms can strengthen the capabilities needed to translate sustainability pressures into operational change.