Building Eco‐Innovation in SMEs Through Circular Economy Capability: Revisiting the Role of Green Transformational Leadership

ABSTRACT

Resource‐constrained small and medium‐sized enterprises (SMEs) often struggle to translate sustainability ambitions into eco‐innovation because environmental initiatives must also support economic survival. Although green transformational leadership (GTL) is widely recognized as a driver of eco‐innovation, little is known about how it enables SMEs to develop the organizational capabilities needed to achieve both environmental and economic objectives. Drawing on the Resource‐Based View (RBV), this study examines whether circular economy capability (CEC) mediates the relationship between GTL and eco‐innovation and whether innovative climate (IC) strengthens this relationship. A repeated cross‐sectional design was employed among emerging‐economy SMEs (Study 1, n  = 335; Study 2, n  = 302), with each study adopting a three‐wave, multi‐source survey design with temporal separation between measurements. The hypotheses were tested using partial least squares structural equation modelling (PLS‐SEM). The findings show that GTL is positively associated with eco‐innovation primarily by developing CEC, with CEC partially mediating the leadership–innovation relationship across both study periods. Although IC has no direct effect on eco‐innovation, it significantly strengthens the positive influence of CEC on eco‐innovation. The replication of these relationships across the two study periods, alongside stronger capability‐related associations in Study 2, indicates the robustness of the proposed relationships across temporally separated samples. By extending the RBV, this study demonstrates that the strategic value of green leadership lies in developing capabilities that reconcile environmental sustainability with operational efficiency and firm competitiveness, offering important implications for SMEs pursuing sustainable innovation under resource constraints.