Complementary Capabilities for Circular Practices: Firm-Level Evidence in Germany on the Role of Digitalization and Innovation

Abstract

The transition to a circular economy (CE) requires firms to reconfigure business models, processes and capabilities. This paper investigates how digital readiness and innovation activities are associated with circular practices in German industry and industry-related services. It also examines four capability configurations involving sustainability orientation and economic performance. Drawing on survey data from approximately 300 German firms, we estimate logistic regression models with interaction effects to assess conditional relationships rather than isolated drivers. Neither digital readiness nor innovation activities alone show a significant association with CE implementation. Their interaction is positive and statistically significant at the 10% level. Firms seem more likely to adopt CE practices when innovation activities coincide with higher levels of digital readiness. The exploratory analysis finds no significant evidence for interactions involving digital readiness, innovation activities, sustainability orientation, and economic performance. The study contributes firm‑level evidence to the CE literature and provides policy‑relevant insights for data‑driven regulatory frameworks.