Converting Artificial Intelligence Into Circular Economy Performance: The Roles of Circular Manufacturing Capabilities and Responsible Leadership

Whether investment in artificial intelligence (AI) translates into circular economy gains remains uncertain, particularly in developing economies. Drawing on dynamic capabilities theory, this study examines how organizational AI adoption relates to circular economy performance in large-scale manufacturing firms in Pakistan. Using two-wave survey data from 216 senior managers, we find that AI adoption is positively associated with circular economy performance, both directly and indirectly through circular manufacturing capabilities, indicating partial mediation. Because the mediator and the outcome were measured concurrently, this indirect association is not interpreted as a temporal sequence. Responsible leadership moderates the association between AI adoption and circular manufacturing capabilities, and the indirect association is stronger when responsible leadership is high. Although the effects are modest, the pattern suggests that digital technologies support circular transitions mainly when firms build supporting capabilities under ethically oriented leadership. Implications for capability-focused industrial and trade policy in developing economies are discussed.