Artificial intelligence and knowledge dynamics for circular innovation: A moderated mediation framework

Malaysia’s rapid industrialization has intensified resource depletion and environmental degradation, heightening the need for circular innovation driven by artificial intelligence (AI) and knowledge-based solutions. However, few empirical studies have examined how AI incorporation, circular innovation, and entrepreneurial learning enhance the process of circular product development through effective knowledge transfer in emerging economies. To overcome this gap, this paper develops a moderated mediation model based on the Resource-Based View (RBV), Dynamic Capabilities Theory (DCT), and the Knowledge-Based View (KBV). A cross-sectional survey involving 450 managers of manufacturing and technology-intensive companies in Malaysia was conducted, and the resultant data were processed via Partial Least Squares Structural Equation Modeling (PLS-SEM). The empirical results suggest that Circular Innovation Orientation (CIO), AI-Driven Decision Support (AIDS), and Entrepreneurial Learning Behavior (ELB) have a significant positive impact on circular product development, both directly and indirectly, due to increased Knowledge Transfer Effectiveness (KTE). The quality of digital infrastructure and support for innovation at the institutional level reinforces these indirect effects, highlighting their critical role in translating internal capabilities into tangible circular innovation results. Theoretically, the paper incorporates the RBV, DCT, and the KBV to form a unified circle of innovation and explains how digital and institutional ecosystems moderate the relationship between capabilities and performance. The findings also have practical implications for Malaysian managers and policymakers, who should invest in AI, increase digital preparedness, and strengthen the institutional system. The research contributes to the existing body of work regarding the circular economy (CE) by introducing a context-specific model that can be reproduced in other emerging economies that are engaged in sustainable industrial change.