Artificial intelligence‐based dynamic capabilities and circular supply chain: Analyzing the potential indirect effect of frugal innovation in retailing firms

Ayman wael AL‐khatib and Thurasamy Ramayah

Business Strategy and the Environment, 2025, vol. 34, issue 1, 830-848

Abstract: Academics and practitioners are increasingly interested in the role of the circular supply chains in maximizing resource use and improving sustainable performance. However, the shift from linear to circular supply chains is still at an early stage and still needs more research. The current study seeks to test the direct effects of artificial intelligence‐based dynamic capabilities on frugal innovation and circular supply chains in a group of retail firms operating in Jordan. The current paper also aims to test the potential indirect effect of frugal innovation. To achieve these objectives, a research framework was developed that explains hypothesized relationships between the previous constructs and was tested empirically through a sample of 212 respondents from the top administrative level in these firms. The casual and quantitative approach was employed to test the hypothetical relationships, and the partial least squares‐structural equation modelling (PLS‐SEM) approach was employed as a tool to analyze the data. The empirical results reported through data analysis showed acceptance of all hypothesized relationships that were hypothesized in this study, as there was a positive effect of both artificial intelligence‐based dynamic capabilities and frugal innovation on circular supply chains. In addition, the mediation was statistically significant, as frugal innovation mediated the relationship between artificial intelligence‐based dynamic capabilities and circular supply chains. This study had a set of interesting contributions at the theoretical and the managerial contributions, as this paper is the first work in the body of the literature that explores these innovative relationships. The current paper also contributed to developing recommendations that would improve sustainable performance in the retail sector by enhancing its dynamic capabilities based on artificial intelligence tools, which leads to strengthening circular supply chains.

Date: 2025
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