Exploring the Relationship Between Circular Economy Practices and Growth in Manufacturing SMEs

The circular economy has been acknowledged as key for manufacturing firms, wishing overcome challenges, particularly relates it to business growth. However, the transition to linear economy at circular economy has been slow in literature, particularly there are relatively few studies that have focused on the relationship of circular economy practices and growth of small and medium-sized manufacturing companies, for this reason this study's main objective is to fill this existing gap in the literature. In addition, a self-administered questionnaire was distributed to a sample of 400 companies in the automotive and auto parts industry in Mexico, analyzing the data set using confirmatory factor analysis and structural equation models. The results obtained follow that the circular economy has a significant positive impact on the growth level of small manufacturing firms in the automotive and autoparts industries.


Introduction
The circular economy (CE) concept was introduced in the literature in 1980s when the first article analyzing this construct was published, and since then it has received significant attention from researchers, academics, and industry professionals (Lieder & Rashid, 2016). Likewise, the existing literature offers a diversity of CE definitions, most of them agreeing that the concept practically refers to the harmonization between the firm's economic growth and environment protection (Bassi & Dias, 2019). In addition, the most used definitions of CE consider the 3Rs: reduction, reuse, and recycling, since these three elements describe more accurately the fundamental activities carried out in CE implementation in manufacturing firms (Liu et al., 2017).
In this sense, the most CE definition used in the literature is the established by Ellen MacArthur Foundation (2015), who includes in its definition the economic and environmental advantages of CE, considering that CE can be conceptualized as "an industrial economy that is totally reconstituted or regenerative with the intention of designing products with part of reuse or recycling" (EMF, 2015: 52). Furthermore, a substantial element in this definition is the difference between linear economy and CE, in which it is established that linear economy is perceived as the end of product life cycle that becomes a waste, while CE is considered as a resource that influences sustainable development, and, recently, on economy business growth (Bassi & Dias, 2019). However, the implementation of different circular economy practices (CEP) in manufacturing firms of all sizes and sectors, it is generally considered as an investment that does not generate any economic benefit (Dalhammar, 2016), for which public administration required to develop policies that not only favor CEP, but also inform the benefits that this entails (Bassi & Dias, 2019). Likewise, researchers, academics, and industry professionals have recognized that CEP generate different environmental and economic benefits for organizations and automotive industry companies, since a higher level of small firm's growth (Vargas-Herná ndez & López-Lemus, 2021), and higher market development (Dalhammar, 2016). and production is vital for sustainable development improvement, so that consumers must support CEP to consume products that eco-friendly to environment (Bassi & Dias, 2019). As a result of the above, various studies have focused on the analysis and discussion of CEP in manufacturing firms in different parts of the world such as United Kingdom (McDonald & Oates, 2003), Switzerland (Jansson et al., 2010), Finland and Netherlands (Repo et al., 2018), Japan (Hanyu et al., 2000), and China (Huang et al., 2006), in different industrial sectors such as automotive sector (Ge & Jackson, 2014), and in different areas such as in Scandinavian countries (Dalhammar, 2016).
Likewise, CEP have commonly been oriented in large companies, leaving aside their analysis and discussion in small and medium-sized enterprises (SMEs) , even though this firms represent around 95% of the total companies in OECD member countries (OECD, 2017), generate between 40 and 45% of the total industrial pollution and water and energy consumption . Therefore, it is possible to establish that CEP in SMEs can be considered as inconclusive (Rizos et al., 2016;Ormazabal et al., 2018;Bassi & Dias, 2019). Thus, this study contributes to CE literature with new knowledge generation, in addition to also complementing other papers published in the current literature Bassi & Dias, 2019;Vargas-Herná ndez & López-Lemus, 2021).
For this reason, when the relationship between CEP and SMEs manufacturing growth is considered inconclusive in the literature, this study tries to expand and complement knowledge and provide robust empirical evidence that allows establishing the following research question: What is the relationship between circular economy practices and SMEs manufacturing growth in the automotive industry? The rest of the study has been structured as follows: in the second section the literature review is presented, and the research hypothesis is established; in the third section the methodology used is set; The fourth section includes the analysis and interpretation of the results and finally, in the fifth section the conclusions, limitations and future studies are noted.

Literature Review
In the literature it is clearly established various environmental, economic, and social consequences that generate natural resources depletion, which is generating an essential change in consumers, organizations and public administration that requires better environment and sustainability protection . However, most manufacturing firms around the world are implemented an out-of-date linear economic system, which practically consists in "do it, take it, use it and throw it away" . In contrast, CE emerges as "an economic system that represents a paradigm shift in society and is totally interrelated with nature by establishing the prevention of the depletion of natural resources, the proper use of energy, materials and raw materials which facilitates sustainable development" (Prieto-Sandoval et al., 2018: 607).
Furthermore, nations such as Germany, France, United Kingdom, Japan and China have made substantial progress in the adoption and implementation of policies that facilitate and promote CEP use (Blomsma & Brenan, 2017;Murray et al., 2017), such as the Action Plan implemented by European Community (European Commission, 2016), which is one of the main drivers of CEP adoption and implementation among various manufacturing firms in European Union countries, each one setting specific goals and their scope (Gordeeva, 2017). This Action Plan establishes that products must be redesigned by manufacturing firms to facilitate their repair, maintenance, recycling, remanufacturing, and incorporation many recycled materials as possible (Hughes, 2017).
Likewise, SMEs are the group of companies that have the greatest influence on the process of CEP adoption and implementation through the Action Plan, since they represent around 99% of the total of existing firms in European Union (Filipe et al., 2016). However, it is not strange to find in the scientific literature that various researchers, academics and professionals in the industry have demonstrated and provided evidence of the effects that SMEs have on sustainable development, since 70% of global SMEs generate around 45% of the total polluting emissions of the industries, and around 40% of the consumption of water and energy of the total of the countries that make up European Union , which shows the importance of the adoption of CEP in SMEs manufacturing firms.
Recent studies published in the literature highlight the various benefits and opportunities of implementing CEPs in manufacturing firms (e.g., Kumar et al., 2019;Aloini et al., 2020), but a high percentage of SMEs manufacturing firms around the world, they do not have a clear knowledge of the advantages offered by the application of CEP (Jaeger & Upadhyay, 2020), nor the experience in this context (Fobbe & Hilletofth, 2023). To enable a generalized transition from the flow of linear to circular resources in organizations, SMEs manufacturing firms play an essential role, derived from the impact on the global economy, society, and sustainable development that these types of companies have (Blomsma et al., 2019;Jaeger & Upadhyay, 2020;Bjornbet et al., 2021). However, despite the high growing promotion od CEP by scientific, academy, and social community, less than 9% of the world economy is circular (Circle Economy, 2020).
In this context, CEP allows to regenerate the economic system of the companies in which the input of materials and energy and the output of waste and CO 2 are minimized, while it allows an economy growth of the companies (Geissdoerfer et al., 2017;Kirchherr et al., 2017). Therefore, CEP is generally recognized as a key approach for sustainable development of manufacturing SMEs (Ellen MacArthur Foundation, 2022). Finally, products should be returned to manufacturing SMEs such as materials and energy (Park et al., 2010;Ellen MacArthur Foundation, 2013), generating the least amount of waste, which is presented in two ways possible: biological wastes that are returned to the biosphere, and technical wastes that are generally returned to industries as part of their processes (McDonough & Braungart, 2002).
In this sense, manufacturing SMEs play an essential role in CEP implementation, since they represent the largest percentage of firms participating in the market . Likewise, SMEs are too heterogeneous and generally do not have the same level of development and maturity of sustainable development (Ormazabal & Puga-Leal, 2016), so the application of diverse CEP have different effects on their growth level. However, most of the manufacturing SMEs were established under a linear economy process, therefore, to make the change to a circular economy process, they require progressive stages to improve their sustainability level, but it is also true that there are SMEs in which it is possible to implement CEP from one day to the next . Therefore, to support SMEs to improve sustainable development management level, Ormazabal et al. (2015) proposed a maturity environmental management model maturation, which allow manufacturing SMEs to be more reactive in their maturation stage, in such a way that they significantly improve their proactivity level in CEP implementation. However, manufacturing SMEs are generally more reactive than proactive in environmental issues due to the economic costs they represent, in addition to not perceiving a significant relationship between various environmental practices and the SMEs profitability and growth (Biondi et al., 2002).
Thus, CEP should be aligned not only with environmental practices, but also provide a higher level of economic growth for manufacturing SMEs, so that they are able to "create, capture and deliver value by creating more a value that allows SMEs to improve the efficiency of resources, thereby contributing to the extension of the life cycle of products (redesign, repair and remanufacturing) and raw materials" (Nubholz, 2017: 15). Therefore, efficiency in environmental management may improve CEP in manufacturing SMEs, through the recycling and remanufacturing of their products (Geyer & Jackson, 2004;Zhang et al., 2011;Ongondo et al., 2013), offering rental services instead of their sale (Bakker et al., 2014), and dismantling (Ehrenfeld, 2000;Yang et al., 2014), which could generate a higher growth level in manufacturing SMEs.
In this same order of ideas, if manufacturing SMEs properly apply CEP, they could possibly be able to increase environmental practices collaboration with other SMEs . In this sense, Biondi et al. (2002) and Daddi and Iraldo (2015) provided empirical evidence showing that manufacturing SMEs can acquire various competitive advantages, if they work collaboratively with other companies in the same sector or in another industry, since they can create an industrial symbiosis that facilitate the recycling and reuse of raw materials, making their different production processes generate not only more environmentally friendly products, but also a greater profit margin and business growth .
Likewise, industrial symbiosis represents an essential element in CEP implementation in manufacturing SMEs, because it is considered as "the activity that involves traditionally separate companies in a collective approach to obtain competitive advantages through exchange physical of materials, energy, water and/or products" (Chertow, 2000: 315). However, studies published in the literature have shown that CEP implementation in manufacturing SMEs generates numerous barriers that they have to avoid (e.g. Rizos et al., 2016;Ritzen & Sandström, 2017;Nubholz, 2017), but there are also other studies that establish various opportunities for manufacturing SMEs to reduce uncertainty in CEP implementation (e.g. del Rí o et al., 2016;Ormazabal & Puga-Leal, 2016;Rizos et al., 2016).
Under this perspective, CEP implementation in manufacturing SMEs, can represent an opportunity for firm to generate various innovations that contribute to natural environment regeneration through the improvement of their environmental actions (Carrillo-Hermosilla et al., 2010). In this sense, Ellen MacArthur Foundation (2015: 51) considered that CEP implementation in firms in the mobility, automotive, food and construction sectors can help improve environment, because "CO 2 emissions will have to be reduced by 48% by 2030 and 83% by 2050, compared to 2012 emission levels, in (Zanoli & Naspetti, 2002;Bougherara & Combris, 2009), and the creation of more sustainable products that can improve both eco-innovation cycles development and SMEs growth level (Hofstra & Huisingh, 2014;Prieto-Sandoval et al., 2016). Therefore, considering the information presented above, it is possible to pose the following research hypothesis.
H1: The circular economy practices have a significant positive influence on SMEs level growth.

Research Design
Theoretical representation was the criterion used to identify manufacturing SMEs in the automotive industry operating in Mexico. A four-stage filter was used to identify the organizations to participate in this study. Firstly, we screened for manufacturing SMEs that participated in automotive industry supply chain. Secondly, we identify manufacturing SMEs that had associated their production with the main stakeholders of the vehicle assembly companies, at the same time, aiming to be economic growth successful. Thirdly, we selected SMEs that were transitioning from a linear economy to a circular economy in their production processes, and as a result, contributed toa reduction in environmental waste. Fourthly, AMIA (Mexican Automotive Industry Association) executives who supported the study with data from the board of SMEs and, of course, the organization's directives to participate in this study.
Considering the statistical equation proposed by Murray and Larry (2005), and to reduce the sampling error to have a higher quality of data, in this study calculate the probabilistic sample size with 95% confidentiality and a maximum error of 5%, obtaining a sample of 460 companies. To demonstrate that desired statistical power of sample is met, they were calculated through GPower, whereby sample size N is computed as a function of power level 1 − β, significance level α, and the to-be-detected population effect size, obtaining a sample of 460 firm.

Data Collection
As a primary method of data collection, 10 semi-structured interviews were conducted with three researchers from innovation area and seven entrepreneurs from the automotive industry, who can provide information regarding aspects of CEP approach. Before the interviews, we conducted, a questionnaire design was established to increase study reliability and validity, and questionnaire were tested to ten entrepreneurs of automotive industry for understandability, duration and to clarify potential ambiguities. These types of studies are essential for validation when applying self-administered questionnaires or when using previously validated scales (Bryman, 2016;Hair et al., 2016).
The questionnaire was applied to a sample of 460 small firms selected through simple random sampling, with a maximum error of ±4% and 95% reliability level, applying during the months of January to March 2019. At the beginning of the questionnaire applied, the respondents were briefed on the purpose of the study and guaranteed anonymity. The questionnaire had two parts. On one hand, focused on the growth level of manufacturing SME in the last two years. On other hand, focused on manufacturing SME engagement related to CEP implementation efforts. The transcriptions were sent to the 460 questionnaires to check for potential errors in SPSS software, thus enduring reliability and internal validity of the measurement scales used (Hair et al., 2016).
Furthermore, for CEP measurement, an adaptation was made to the scale proposed by Zhu et al. (2010), who considered that CEP can be measured through 3 factors: internal environmental management measured through 10 items; eco-design measured by 4 items and investment recovery measured through 5 items. Regarding the growth level measurement, this was measured through the sales made by SMEs in 2018 (Autio & Lumme, 1998;Ballow et al., 2004;Salojä rvi et al., 2005;Linder, 2006;Carneiro, 2007;Kruger & Johnson, 2009), since in order to estimate the growth potential that SMEs may have, a manager's qualitative evaluation is generally considered, with sales being, the main indicator for their measurement (Autio & Lumme, 1998). Likewise, a five-point Likert-type scale was used to measure all the items on CEP scale with 1 = total disagreement and 5 = total agreement as limits, since this scale provides a balance between the interviewee's complexity and the information analysis (Forza, 2016;Hair et al., 2016).

Data Analysis
The data were analyzed in a multistep process following the guidelines from Bentler (2005), Brown (2006) and Byrne (2006). EQS 6.2 software was used to facilitate the process and ensure analytical rigor (Bentler, 2005;Brown, 2006;Byrne, 2006). The data were analyzed, in the first phase, through Confirmatory Factor Analysis (CFA) using the maximum likelihood method, to measure reliability and validity and, in the second phase, through Structural Equation Modelling (SEM), to test the research hypothesis. Cronbachś Alpha and Composite Reliability Index (CRI) were used to measure reliability (Bagozzi & Yi, 1988), and Extracted Variance Index (EVI) were used to measure validity (Fornell & Larcker, 1981).
CFA results are presented in Table 1 and show that Cronbachś Alpha and CRI values are greater than 0.70 value proposed by Nunally and Bersntein (1994) and Hair et al. (2014), and EVI values are greater than 0.50 value proposed by Fornell and Larcker (1981). As evidence of the convergent validity, CFA results indicate that all the items of the related factors are significant (p < 0.01), the size of all the standardized factor loads are greater than 0.60 (Bagozzi & Yi, 1988). Finally, data analysis provides empirical evidence of the reliability and validity of the measurement scales used in this study, and justifies its internal reliability (Nunally & Bersntein, 1994;Hair et al., 2014). 0.965*** 8.448 S-BX 2 (df = 146) = 996.639; p < 0.000; NFI = 0.837; NNFI = 0.832; CFI = 0.856; RMSEA = 0.079 a = Constrained parameters to such value in the identification process *** = p < 0.01

Results
Normalized Fit Index (NFI), Non-Normalized Fit Index (NNFI), Comparative Fit Index (IFI) and square root of the mean of the approximation error (RMSEA) were considered in SEM analysis (Bentler & Bonnet, 1980;Byrne, 1989;Bentler, 1990;Hair et al., 2014;Chau, 1997;Heck, 1998). Segars and Grover (1993) considered that NFI, NNFI and CFI have an average value from 0.80 to 0.89, it is considered that there is a reasonable adjustment of the theoretical model. Conversely, if the average of these indices is equal or above 0.90, then there is evidence of an excellent adjustment of the theoretical model (Jöreskog & Sörbom, 1986;Byrne, 1989;Papke-Shields et al., 2002), and when the value of RMSEA is below 0.080, it is considered acceptable (Jöreskog & Sörbom, 1986, Hair et al., 2014. Results show that the measurement model has a good fit of statistical data analysis (S-B X 2 = 996.639; df = 146; p = 0.000; NFI = 0.837; NNFI = 0.832; CFI = 0.856; RMSEA = 0.079) and provide empirical evidence that shows that CEP has a significant positive relationship with the growth level of manufacturing SMEs. Table 2 shows in greater detail the results obtained from the application of SEM.  Table 2 shows the results obtained from SEM application and, with respect to the hypothesis H1, the results obtained β = 0.997 p <0.001, indicate that CEP have a positive effect in business growth in manufacturing SMEs in the automotive industry. In conclusion, it can be corroborated the existence of a strong relationship between CEP and business growth of manufacturing SMEs, which allows us to conclude that CEP is an excellent predictor of manufacturing SMEs growth.
The results obtained in this study support our argument that CEP has a positive effect on business growth of manufacturing SMEs, these results being consistent with those by Ormazabal et al. (2018), Bassi and Dias (2019), and Vargas-Herná ndez and López-Lemus (2021). The main reasons that could explain this positive effect are, on one hand, the clarity that manufacturing SMEs directives have of various benefits generated by the implementation of CEP in the organizations, not only in sustainable development issues, but also in economic growth issues. On other hand, the strong pressure that manufacturing SMEs directives are increasingly facing form stakeholders for adoption and implementation CEP, as well as tightening of environmental standard by public administration, so that manufacturing SMEs adopt production process systems that improve environmental and sustainable development.

Practical Implications
The results obtained in this study have various implications for both directives and manufacturing SMEs. A first implication derived from the results obtained is that studies published in the literature have provided empirical evidence that shows the existence of internal and external factors that favor the adoption and implementation of CEP (e.g. Yadav et al., 2018), among which stand out the obtaining of economic benefits and the improvement of firms growth, as internal factors, and the demand for green products by the market, as an external factor (Bassi & Dias, 2019). In this sense, CEP allow manufacturing SMEs a significant reduction in waste through a system that stimulates sustainable products life cycle (Ghisellini et al., 2016;Despeisse et al., 2017), which will allow them to close the life cycle of both materials and products refusal (Akinade & Oyedele, 2019).
A second implication is that the relationship between CEP and economic business growth has recently been gaining interest by researchers, academics, and industry professionals community (e.g. Ghisellini et al., 2016;Despeisse et al., 2017), and it is commonly considered as a promising field of research that can be exploited for the provision of theoretical and empirical evidence that explains the diverse benefits that manufacturing SMEs adopt and implementation of CEP, including a higher level of business growth, even though there are also studies published in the literature that establish that manufacturing SMEs do not have the resources and experience to carry out sustainable activities (Cassells & Lewis, 2011).
A third implication is that CEP incorporate activities that lead to a significant reduction in materials waste in the production process of manufacturing SMEs, which implicitly allows the generation of activities that improve sustainable development (Geissdoerfer et al., 2017). Additionally, there are two positions in the literature on the relationship between CEP and business growth, on the one hand, who argue that both constructs are interdependent (Sauvé et al., 2016), while others consider that there is a significant positive relationship, since both constructs have a high correlation (Geissdoerfer et al., 2017), which is why this paper provides robust empirical evidence that strengthens this second position.
This study has several limitations that must be considered when interpreting the results, the first of which is related to the measurement scales of CEP and firm's growth level, since these two important constructs were measured through subjective indicators obtained through the survey application. Therefore, in future studies it will be necessary to use hard data from manufacturing SMEs (e.g., investment for internal environmental management; investment for eco-design; and investment recovery of the implementation of CEP), to verify if the results obtained differ or not from those obtained in this paper.
A second limitation of this study is that the relationship between CEP and firm's growth level, possibly generates more significant results if a moderating variable of the managers individual characteristics of manufacturing SMEs is integrated (e.g., leadership, commitment, managerial capacity, experience). Therefore, in future studies it would be pertinent to add some moderating variable that significantly improves the relationship between CEP and business growth, to corroborate if the results obtained are similar or better to those obtained in this study or replicate this same study in another sector or industry to corroborate these same results.
A third and final limitation of this study is that only three factors or dimensions were considered for CEP measurement and a single item for firms growth level measurement, which were the most cited in the literature, but no type or dimension of business growth was considered, so in future studies it will be pertinent to consider other direct measurement scales of CEP, and apply this same questionnaire in Argentina or Brazil that have similar economy and manufacturing SMEs conditions in the automotive industry, to verify if the results obtained are similar those obtained in this study.

Conclusions
The results obtained in this empirical study have different conclusions. First, some of the studies published in the literature that have focused on the analysis of CEP in manufacturing SMEs have basically focused on the analysis and discussion of management of environmental practices, such as obtaining the different certifications and reduction of the use of raw materials, practically leaving aside the economic and financial effects that are general within organizations, such as the business growth level. For this reason, this study provides theoretical and empirical evidence of the relationship between CEP and firm's growth in manufacturing SMEs, especially those companies that make up the automotive industry of an emerging economy country, such as Mexico, which is the most important industry and the one that has greatest contribution to the economy development.
Second, even though it has been shown in some previously published articles that several of manufacturing SMEs managers, do not consider that CEP can generate economic benefits and an increase in market share, it is also true that there are other articles that demonstrate the opposite. Therefore, it is possible to conclude that since most manufacturing SMEs have serious limitations on their resources, a short-term vision of their organization and lack of personnel to carry out innovation activities, it is important that they implement CEP as one of its priority business activities, not only to comply with environmental regulations established by public administration, but also to achieve a higher business growth level.
Third, it is also possible to conclude the existence of essential opportunities for manufacturing SMEs to adopt and implement CEP, since they can interact with other small or large companies in the same sector to carry out collaborative activities, in such a way that they allow sharing information and resources to facilitate the transition from a linear economy to a circular economy. Therefore, in terms of CEP, it can be concluded that manufacturing SMEs in the automotive industry have more opportunities than barriers for the implementation of CEP, which can be translated into a significant increase in their business growth level.