Bridging the Gap Between the Source of Innovation and the Implementation of Circular Economy Principles in SMEs Within Emerging Economies: The Mediating Role of Frugal Innovation

ABSTRACT Small and medium‐sized enterprises (SMEs) in emerging economies encounter various challenges when it comes to adopting circular economy ( CE ) principles due to their resource‐constrained contexts. Consequently, they often rely on innovation to facilitate the implementation of these principles. In this study, we explore the effect of source of innovation, generation or adoption, on the implementation of CE principles within SMEs in emerging economies. We also go one step further and examine the mechanism through which the source of innovation affects the implementation of CE principles. We argue that in resource‐constrained contexts, firm may use frugal innovation as a mediator in the relationship between the source of innovation and the implementation of CE principles. We collected 306 survey responses from SMEs in India and Pakistan and analyzed the data through PLS‐SEM using SMARTPLS4 software. The findings indicate that both innovation generation and innovation adoption have a positive effect on implementing CE principles, with innovation adoption showing the most significant effect. Additionally, we discovered that frugal innovation plays a partial mediator role in the relationship between innovation generation/innovation adoption and implementing CE principles. These results suggest that SMEs in emerging economies can leverage both innovation generation and adoption to advance the adoption of CE principles, fostering the development of frugal innovations in the process, which further drive the implementation of CE principles. Moreover, our findings contribute to the ongoing research debate regarding the relationship between frugal innovation and sustainability, highlighting the impact of frugal innovation on environmental sustainability.