Sustainable growth of a firm through circular economy practices: disclosing the case of agri-food processing sectors in the north western province

Abstract

In Sri Lanka, small and medium-scale enterprises (SMEs) in the agri-food sector play a vital role in economic development, yet face growing pressure to adopt sustainable practices in response to climate change, resource scarcity, and regulatory demands, etc. Shifts towards a circular economy (CE) in agriculture have been acclaimed as a pathway for creating value through innovation, enabling firms to simultaneously achieve economic growth and environmental sustainability. On this understanding, this study examines how different social system factors: market forces, government regulations, and judicial mechanisms influence the adoption of CE practices among agri-food processing SMEs in the North Western Province of Sri Lanka. Using a quantitative approach, data were gathered through structured questionnaires from a sample of 50 SMEs, selected via random sampling from records of the Provincial Environmental Authority. The survey assessed adoption across five CE activity areas: Take, Make, Distribute, Use, and Recover, while also measuring the perceived influence of five incentive categories: Cost implications; Sales and revenue; Existing regulations; Anticipated regulations, and Liability laws, to which responses were assessed using Likert scales. The results suggest that nearly half of the firms studied possess a ‘high’ level of CE adoption, while others reported ‘moderate’ or ‘low’ adoption. An Incentive Index was developed by dividing the aggregated scores provided on the Likert scales by the maximum potential score to normalize the results. The Measurement Model derived indicates strong Internal Consistency and Reliability (Cronbach’s alpha values). The results from Multiple Linear Regression (IBM SPSS) showed that existing government regulation (EGR) had a significant influence (β = 0.541, **p < 0.001), emphasizing the role of policy enforcement in fostering innovative, value-creating, sustainable practices. Overall, the study emphasizes that robust regulatory frameworks, combined with targeted incentives, can empower SMEs to innovate and generate both economic and environmental value through circular economy practices.