The Mediating Role of Circular Economy and Moderating Role of Institutional Pressures on Service Innovation and Sustainable Development

Abstract

This study examines how open and closed service innovations impact the United Nations Sustainable Development Goals (SDGs) within a local government ecosystem, evaluating circular economy (CE) practices as mediators and institutional pressures as moderators. Employing a proportionate stratified random sampling method, survey data was gathered from 155 municipal participants across Malaysia and analyzed using PLS-SEM. The findings reveal that both closed and open service innovations advance economic and social sustainability; closed innovation yields an insignificant environmental impact. Conversely, open innovation significantly drives all three sustainability dimensions. Crucially, CE practices serve as an indispensable partial mediator, transforming innovative public services into tangible resource loops. Furthermore, moderation analysis indicates that external normative pressure reinforces the link between collaborative open innovation and circular practices. However, regulatory demands exert no statistically significant moderating effect. Theoretically, this study advances Institutional Theory by demonstrating that normative stakeholder pressure, rather than coercive regulatory demand, drives public-sector CE adoption. Practically, it introduces a novel multidimensional framework for resource-constrained municipalities, empirically validating circular practices as the essential structural link that translates municipal service innovations into micro-level SDG implementation.