Capabilities for circular economy innovation: Factors leading to product/ service innovations in the construction and manufacturing industries

As companies in the manufacturing and construction industries strive to meet the EU circular economy (CE) targets, they need to develop new capabilities to implement CE activities that can positively influence their product/service innovations. However, companies in both industries, and beyond, still struggle to develop internal capabilities to innovate products and services that would help them in implementing CE principles and move towards the CE. The objective of this research is to analyze the types of innovation capabilities that are needed to enable CE implementation and achieve product/service innovations in two different industrial sectors. Prior research has focused on innovating and implementing circular business models and elaborated less on the innovation capability types. We collected survey data in December 2021-January 2022 that consists of responses from companies operating in Germany (n = 177), including employees in manufacturing (n = 87) and construction companies (n = 90). The results from the partial least squares structural equation modeling (PLS-SEM) based on measurement models from the literature indicate that employees in both sectors overall perceive higher levels of CE implementation capability as important for the company's product/service innovations. Furthermore, the results reveal differences in the way CE innovation capability and IT resource orchestration capability influence CE implementation and product/service innovations in the two sectors. Our study offers theoretical implications on how dynamic capabilities are associated with CE innovations and how they influence companies' product/service innovations based on empirical evidence from two industrial sectors. Those capabilities that are crucial for circular product/service innovations need to be associated with CE implementation capabilities. The results further advise practitioners in the development of CE innovation and CE implementation capabilities and how they are linked to IT resource orchestration capability and provide evidence on their relevance to creating product/service innovations.