Wiring the Green Shift: How Digital Dynamic Capabilities Shape the Circular Economy Through Curvilinear Effects of Green Innovation

ABSTRACT Digital transformation is increasingly recognized as a key driver of sustainability, yet empirical insights into how firms leverage digital capabilities to advance the circular economy through green innovation remain limited. Drawing on dynamic capability theory, this study investigates how digital sensing, capturing, and transforming capabilities facilitate firms' green transition, which subsequently drives green product and process innovation, enhancing circular economy performance. Using survey data from 310 manufacturing and service firms in Vietnam, hierarchical regression, polynomial regression, and response surface analysis were employed. Findings reveal that digital sensing and transforming capabilities significantly advance the green transition, whereas digital capturing capability has no significant effect. The green transition positively influences both green product and process innovations. Furthermore, balanced growth in these innovations enhances circular economy outcomes, while imbalances detract from performance. Mediation analysis highlights the central role of green transition and green product innovation in linking digital capabilities to circular outcomes. This study contributes to the literature by elucidating the pathways through which digital transformation promotes sustainability and provides managerial implications for integrating digital and environmental strategies to create circular value.