Green Financing as a Catalyst of Digital Transformation and Circular Economy Adoption: Evidence from Manufacturing SMEs

The structural transition of the Kingdom of Saudi Arabia (KSA) economy from hydrocarbon dependence to knowledge-driven production systems requires firms to adopt digital technologies and circular resource strategies. This study empirically evaluates the extent to which green financing (GF) enables digital transformation (DT), circular economy principles (CEP), and sustainable firm performance (SFP) within manufacturing SMEs, and assesses the moderating role of sustainable development strategies (SDS). Using purposive sampling, primary data were collected from N = 236 manufacturing SMEs operating across KSA industrial sectors (Eastern Province, Riyadh, Makkah). The hypothesized relationships were tested using structural equation modelling (SEM) with maximum likelihood estimation in AMOS. The measurement model demonstrated satisfactory reliability and validity (CR > 0.80; AVE > 0.50), and the structural model exhibited good fit (CFI > 0.92; RMSEA < 0.06). Results indicate that GF is positively associated with DT (β = 0.269, p=.005), CEP (β = 0.144, p=.010), and SFP (β = 0.369, p=.065). DT positively predicts SFP (β = 0.038, p=.044) and CEP (β = 0.103, p=.093). CEP positively predicts SFP (β = 0.376, p=.001). Additionally, SDS strengthens the pathways from GF to DT and CEP. The findings highlight GF as a critical financial mechanism for enhancing technological upgrading, resource efficiency, and long-term sustainability performance in KSA industrial SMEs.