Collaborative Open Innovation for Sustainable Diversification of SMEs in the Circular Economy: Mechanisms, Interactions, and Contingencies

Abstract

This study examines how collaborative open innovation (OI) supports sustainable diversification in small and medium-sized enterprises (SMEs) operating in the circular economy (CE). While prior research has widely discussed open innovation and circular transition, less attention has been paid to how SMEs use collaboration to develop new products, services, markets, or partnership configurations under circular constraints. Using a qualitative multiple-case design, the study draws on 36 semi-structured interviews with SME managers in renewable energy, waste management, and sustainable manufacturing across Germany, France, Italy, Spain, and Sweden, complemented by documentary and policy analysis. The findings identify four recurring collaborative OI practices: cross-sectoral knowledge alliances, supplier-customer co-creation networks, academic-industry research partnerships, and digital platform-based collaboration. These practices support sustainable diversification through four linked mechanisms: improved resource efficiency, product and service innovation, expanded market reach, and stronger institutional legitimacy. These mechanisms do not operate in isolation: legitimacy often serves as a gatekeeper for market expansion, resource efficiency enables product innovation, and pursuing them in the wrong order can reverse diversification gains. The analysis further shows that absorptive capacity and policy support condition whether externally sourced knowledge can be converted into viable circular offerings. The study further identifies four failure patterns (partner misalignment, internal conversion failure, legitimacy deficit, and policy dependency trap) and shows that power asymmetry can lead to knowledge leakage or greenwashing by stronger partners. The article contributes an integrated framework that explains how collaborative OI practices, enabling mechanisms, and contextual conditions failure patterns, and power asymmetries jointly shape whether SMEs translate circular opportunities into resilient diversification or fall into collaborative traps.