Climate change and its direct and indirect consequences are drawing nearer all the time. Droughts and extreme temperatures are only some of the effects most observable to us, but there are many more.
In principle, there is broad agreement in society and politics that we need to change the way we produce and consume toward a more sustainable model. The circular economy is a sustainable economic model. In its ideal version, all natural resources and the energy entering economic processes are used in subsequent processes, thereby eliminating waste entirely (resources that leave production processes without economic value) and also eliminating the need to incorporate new natural resources and energy (since those already used in the processes are continuously reused within the economy).
“The circular economy is a sustainable economic model. In its ideal version, all natural resources and the energy entering economic processes are used in subsequent processes, thereby eliminating waste entirely and also eliminating the need to introduce new natural resources and energy.”
Research and practical experience tell us that implementing the principles of the circular economy not only yields significant environmental benefits but also economic and social gains. Among them, notable examples include increased resilience of value chains (relying less on importing natural resources from third countries), the strengthening of the national or European economy (contributing to GDP through higher economic activity), and job creation (related to refurbishing, remanufacturing, repair, etc.).
There is broad agreement that the transition from the current linear and unsustainable economy to a future circular and sustainable one is both desirable and beneficial for all involved actors. But: if this transition is so economically, ecologically, and socially desirable, why has progress not advanced further?
Advancing the transition toward the circular economy requires considerable effort from both companies (and also consumers), since it demands a profound change in established socio-economic processes, i.e., in the way we produce and consume. With the aim of “closing” linear and open processes, many companies develop innovations—both technological and social (for example, those related to the collaborative economy)—that increase the circularity of these processes. These innovations differ in where they generate higher circularity: they can occur at the micro level within the innovating company itself, or they can extend to the macro level, affecting many firms along the value chain or in a specific economic sector, eventually impacting the economy and society as a whole.
When innovations have an impact on large parts of the economic system, they are referred to as systemic innovations. They are especially relevant in the transition toward a circular economy because they represent a major advance over the current state and a considerable improvement in the circularity of production and consumption processes. Other types of innovations also contribute to the transition, but comparatively less, in cooperation with fewer firms and consumers, or at more local levels.
Undoubtedly, the positive impact on the transition is more noticeable in those innovations that are more systemic and affect a larger number of companies and consumers. Yet, they are also much harder to achieve. And this is even more the case for small and medium-sized enterprises (SMEs), which due to their small size have fewer resources available for innovation processes, and because the cooperation networks they are embedded in and on which they can exert some influence are limited. Nevertheless, without SMEs there is no circular economy, because the vast majority of companies in Spain and Europe are SMEs (0.998% according to Eurostat, 2023).
The question has arisen whether SMEs can also introduce systemic innovations and thus contribute to the transition toward the circular economy, or whether only large companies can do so.
A team from CSIC and the University of Alcalá (UAH) studied this question by surveying SMEs in the industrial sector in Spain. They concluded that SMEs do have the potential to contribute to the transition toward the circular economy, but they also highlight their specific situation and their particular needs.
“Almost half of the Spanish SMEs surveyed allocate resources to innovation processes”
In fact, almost half of the Spanish SMEs surveyed allocate resources to innovation processes (a finding also highlighted by the Chamber of Commerce and Mapfre report on the Circular Economy). Some SMEs do so more systematically, and others more ad hoc. Internal development and continuous improvement are the most common pathways (nearly 60% of all innovations in SMEs are developed internally and with no external cooperation). 30% are implementations of innovations developed by third parties. Only 10% of SMEs develop innovations in cooperation with other companies or institutions such as universities.
Regarding the contribution of these innovations to the circular economy, there are pronounced differences. Most innovations developed in the surveyed SMEs contribute some aspect of sustainability. Almost half of the innovations (45%) increase circularity in processes within the company (for example, by making use of leftover material or residual heat in other processes). About one third of the innovations (30%) increase circularity in economic processes in cooperation with other enterprises or consumers (mostly colocated or geographically close). And finally, 20% of the innovations developed by the SMEs surveyed have a more systemic impact, representing a significant advance toward the circular economy.
These figures are positive news, because they show that, despite their small size, Spanish SMEs are relatively active in innovation and actively contribute to positive change and to circularity. Nevertheless, the data also reveal peculiarities. First of all, Spanish SMEs tend to be “lone wolves” when innovating. Most do not resort to external cooperation (somewhat surprising given the limited resources of SMEs) and focus on developing new solutions or technologies for internal use. In this, they seem to have a mindset oriented toward directly solving day-to-day problems. In some cases (about 20% of innovations), the innovations developed are subsequently adopted by other sector firms. This underscores the relevance and “quality” of some of the innovations thus developed, and also the subsequent contribution of these innovations to the circular economy.
“Fostering innovative activity for the circular economy in Spanish SMEs can be based on strengthening internal innovation capabilities”
Fostering innovative activity for the circular economy in Spanish SMEs can be based on strengthening the internal capabilities of innovation; something that might not seem intuitive at first glance, because the common understanding of the circular economy is that one reaches a closed-loop economic system only through close collaboration with others. It seems that circularity is a result of several aspects of innovative activity. In the case of SMEs, boosting internal capabilities is closely linked to the availability of resources (both tangible and intangible). Technology, know-how, and human resources are examples of highly valuable resources for innovation that must be available in SMEs. Business strategies and public policies can help create, improve, and expand the existing resource base. Obviously, not all economic sectors require cutting-edge, top-generation technology, but access to the appropriate technology is necessary for this to occur.
Beyond the availability of resources and internal capabilities in SMEs, certain organizational factors related to culture and business strategy (the so-called soft factors) amplify the circularity resulting from the innovations developed. A notable factor is a corporate culture that prioritizes sustainability and a learning orientation. These are not traditional business resources, but they are genuine levers for both economic and ecological success. Firms that cultivate a more sustainable culture and create environments favorable to learning—even through ongoing training of their employees and through experimentation—are able to close loops at higher levels of the economy than their peers without such organizational cultures. In other words, the impact of innovations developed in appropriate corporate contexts tends to extend farther, making these firms more influential over later adopters.
The implications for strategic management by SMEs in relation to the transition to the CE emphasize the importance of strategic forecasting, a commitment to sustainability, and a culture driven by innovation. Managers must navigate the complexities of integrating sustainability with economic objectives. They must also leverage knowledge and learning for innovation to improve their company’s contribution to the CE.
Companies with a low or medium orientation toward sustainability face a managerial dilemma. On the one hand, the findings of this study would support that managers should emphasize continuous improvement and eco-efficient practices to enhance the company’s environmental performance and advance the overarching goals of the circular economy, while also delivering economic returns through efficiency and reduced resource consumption. However, the research shows that the accumulation of incremental changes can confine firms to circular solutions that act as barriers to achieving higher levels of circularity. Therefore, managers should exercise strategic foresight and carefully balance the development of sustainable and efficient innovations in the short term, which can serve as a bridge to higher-impact innovations in circularity in the long term, without stifling them.
“While there is no direct relationship between the intensity of cooperation and higher levels of circularity, managers should not overlook the potential benefits of strategic partnerships”
The study’s results also indicate that having a sustainability-oriented culture within the company can help facilitate the transition to the circular economy, especially through continuous improvement. This underscores the importance for managers to foster an organizational culture in which sustainability is not simply viewed as a compliance requirement, but as a fundamental business strategy. Among the ways to achieve this are the integration of sustainability into the company’s values and vision, the promotion of sustainable practices among employees, and the incorporation of sustainability criteria into decision-making processes.
A third implication for management is the differential impact of learning orientation. Firms focused on continuous improvement should encourage experimentation and innovation, investing in employee training, creating cross-functional teams to facilitate knowledge exchange, and establishing mechanisms to capture and disseminate learning. Conversely, firms should manage internally and collaborate in tight networks, rather than in broader or more global networks. Finally, although there is no direct relationship between the intensity of cooperation and higher levels of circularity, managers should not overlook the potential benefits of strategic partnerships.
