sustainability

Article
Circular Economy Innovation and Environmental
Sustainability Impact on Economic Growth:
An Integrated Model for Sustainable Development
Eglantina Hysa 1 , Alba Kruja 2 , Naqeeb Ur Rehman 1 and Rafael Laurenti 3, *
1 Department of Economics, Epoka University, 1032 Tirana, Albania; [email protected] (E.H.);
[email protected] (N.U.R.)
2 Department of Business Administration, Epoka University, 1032 Tirana, Albania; [email protected]
3 Department of Machine Design, KTH Royal Institute of Technology, Brinellvägen 83,
11428 Stockholm, Sweden
* Correspondence: [email protected]; Tel.: +46-8-790-73-16




Received: 12 May 2020; Accepted: 9 June 2020; Published: 12 June 2020


Abstract: This study examines the link between selected indicators of a circular economy, including
essential components of environmental and economic growth. Developed economies are continuously
innovating to promote growth and giving governmental support to the producers to move from linear
economies to circular ones. Hence, waste materials in industrial systems are recycled or re-used,
improving the efficiency of using finite resources with the no-waste approach. The aim of this paper is
the following: (1) to identify the main components of a circular economy, which are also supportive of
sustainability and development; (2) to check the impact of these variables in the economic growth of
European Union countries; (3) to find out if the three components of sustainable development adopted
to circular economy (CE) indicators (environmental–social–economic) are significant to economic
growth. We used a fixed effect panel data analysis to identify the circular economy’s impact on the
economic growth of European countries. Additionally, to support the results of the regression analysis,
we employed a second method—generalized methods of moments—computing the Arellano–Bond
dynamic panel data estimation method. The model included five independent variables, such as
environmental tax rate, a recycling rate of waste, private investment and jobs in a circular economy,
patents related to recycling, and trade of recyclable raw materials. The identification of each variable
was made based on a deep search through literature. The results of both econometric models showed
a strong and positive correlation between a circular economy to economic growth, highlighting the
crucial role of sustainability, innovation, and investment in no-waste initiatives to promote wealth.

Keywords: circular economy; sustainability; innovation; environmental dimension; economic growth;

panel data

1. Introduction
The circular economy (CE) is perceived as a crucial model for industrial economics to pursue
sustainable development [1–5]. CE is acknowledged “as a solution for harmonizing ambitions for
economic growth and environmental protection” towards the constraints of the take–make–use–dispose
linear economy [6] (p. 37). In [7], it is claimed that “CE provides a reliable framework towards radically
improving the present business model towards preventive and regenerative eco-industrial development
as well as increased wellbeing based on recovered environmental integrity” (p. 27), despite the fact
that CE global pursuit needs further engagement.
Transitioning an economic model from production–consumption–waste to production–consumption–
reuse requires the involvement and commitment of several stakeholders, such as producers, consumers,

Sustainability 2020, 12, 4831; doi:10.3390/su12124831 www.mdpi.com/journal/sustainability

Sustainability 2020, 12, 4831 2 of 16

and policymakers [8]. Value co-creation among these actors is a critical part of the viability of
this economic model, which is expected to have a positive impact on the community’s social life,
the economy‘s sufficiency, and the natural environment [9]. The CE approach has been guided by
the [10] study, where the earth is depicted as a circular, closed system with limited resources, in which
the economy and environment should exist side by side.
Due to its importance and the expected impact on sustainability, CE has received a lot of attention
from researchers, policymakers, and entrepreneurs [11]. The European Circular Economy package [12]
is an indication of the EU commitment towards a CE. On the other hand, entrepreneurs are becoming
conscious of the business model opportunities raised by the CE [3]. Concurrently, [13] point out the
“need to encourage a larger contribution of scholars from the Business and Economics area to explore
the viability and profitability of CE strategies and related managerial practices to overcome related
issues” (p. 1652).
In their systematic literature study, [14] found that the CE “is viewed as a condition for sustainability,
a beneficial relation, or a trade-off” (p. 767). The authors define CE as a “regenerative system in
which resource input and waste, emission, and energy leakage are minimized by slowing, closing,
and narrowing material and energy loops,” and refer to sustainability “as the balanced integration of
economic performance, social inclusiveness, and environmental resilience, to the benefit of current and
future generations” [14] (p. 766).
Some authors have been centered on evaluating the impact of a CE on the natural environment
progress [1,3,4]. Other scholars have been focused on analyzing the CE on an integrated view of
sustainability, including not only the environmental impact, but also the social and economic [15,16].
Some researchers refer to increased job opportunities when evaluating the community’s social life
improvement [7,17,18]. Other authors have built up other aspects of the CE‘s impact on social life,
such as an efficient tax system or consumer behavior change [5].
Besides analyzing the CE‘s impact on society, the economy, and the environment, raising
awareness of the community‘s consumers and promoting the development of circular innovative
business models and governmental policies to support them have been discussed and researched by
many scholars [7,17,19].
In this research, aside from business model innovation and responsible consumers, we present
collaboration through the quadruple helix as another enabler of CE. The novelty of this study lies in the
proposed conceptual framework of the integrated circular economy (Figure 1), which is a theoretical
framework composed of two complementary structures. The first structure is devoted to the necessity
of a quadruple helix model in support of CE. This has been derived and strongly supported by the
literature findings, and not considered to be measured in this paper, whereas the second structure
comprises the three-based scheme of sustainable development—social–environmental–economic—with
innovation in the center as a key driver to CE.
In addition to the proposed framework of an integrated circular economy, the novelty of this
paper is the association of the CE variables with each of the sustainable development aspects:
the social–environmental–economic. Although there are some limited studies using panel data to
measure the impact of CE in GDP, such as [20,21], none of them has considered the CE variables to be
associated with the three dimensions of sustainable development.
Lastly, this study uses two different methods—the fixed effect method and generalized methods
of moments (GMM)—to cross-check the results and strengthen the findings. If the fixed effect method
is a widely used method, but sometimes criticized [22], the GMM, using the Arellano–Bond conditions,
represent a robust method instead [23].
Sustainability 2020, 12, 4831 3 of 16
Sustainability 2020, 12, x FOR PEER REVIEW 3 of 18

Figure 1. Conceptual framework of integrated circular economy.

economy.

Specifically,
In addition toin the
thisproposed
paper, weframework
aim to identify the main components
of an integrated of the the
circular economy, CE novelty
supportive to
of this
sustainability with an impact on economic growth (EG). Referring to this objective, we pursue
paper is the association of the CE variables with each of the sustainable development aspects: the our
analysis on the following research Although
social–environmental–economic. questions (RQs)
there and
are hypotheses (H):studies using panel data to
some limited
measure
RQ1: Are the impact of CEsupportive
CE components in GDP, such as [20,21], none of them has considered the CE variables to
of sustainability?
RQ2: To what extent do the CE components sustainable
be associated with the three dimensions of impact GDP? development.
Lastly, this study uses two different methods—the fixed effect method and generalized methods
H1a: The CE “environment” aspect has a positive impact on GDP.
of moments (GMM)—to cross-check the results and strengthen the findings. If the fixed effect method
H1b: The CE “social” aspect has a positive impact on GDP.
is a widely used method, but sometimes criticized [22], the GMM, using the Arellano–Bond
H1c: The CE “economic” aspect has a positive impact on GDP.
conditions, represent a robust method instead [23].
Specifically, what
Considering in this wepaper, we aim
said before, tostudy
this identify the both
targets maintheoretical
components andofempirical
the CE supportive
contributions to
sustainability with an impact on economic growth (EG). Referring to this objective,
to the literature. Its theoretical contribution is related to the proposed framework on the integrated we pursue our
analysis
CE, which,on on
thethe
following
one hand, research questions
is supported from(RQs)theand hypotheses
quadruple helix(H):
model, and on the other hand,
positions the CE factors in line with the
RQ1: Are CE components supportive of sustainability? sustainable development triangle. Regarding the empirical
contribution,
RQ2: To whatthis extentpaper
do explores and cross-checks
the CE components impactthe GDP?results from two models, exhibiting stronger
evidence on the findings.
H1a: The CE “environment” aspect has a positive impact on GDP.
H1b:This
The paper has the
CE “social” following
aspect structure:
has a positive firstly,
impact onwe
GDP.present a literature review supporting the
proposed
H1c: The CE framework
“economic” of the integrated
aspect circular impact
has a positive economy. Then, we make a theoretical and statistical
on GDP.
description of the independent variables used in the paper. Next, the two methods of panel data are
Considering
applied and checked what forwe said before, this
compatibility andstudy targetsFinally,
validation. both theoretical and empirical
the last session is devotedcontributions
to further
to the literature. Its theoretical contribution is
research, limitations of the study, conclusions, and discussions.related to the proposed framework on the integrated
CE, which, on the one hand, is supported from the quadruple helix model, and on the other hand,
2. Literature
positions theReview
CE factorson Circular
in line with Economy
the sustainable development triangle. Regarding the empirical
contribution, this paper explores and cross-checks the results from two models, exhibiting stronger
2.1. From aon
evidence Linear to a Circular Economy
the findings.
ThisCE
The paper has the
approach had following
achievedstructure:
attention firstly, we present
by the second a literature
half of the 1970s review supporting the
[3]. It conceptualizes a
proposed framework of the integrated circular economy. Then, we make
new economic system of change in business model innovation on one hand, and consumer behavior a theoretical and statistical
description
on the other,ofinthe independent
which, variables
both producers andused in the paper.
consumers focusNext, the two methods
on reprocessing, of panel
restoring, data are
renovating,
applied and checked for compatibility
and recycling previously used materials and validation. Finally, the last session is devoted
products. Since its very beginning, the CE presented to further
itself
research,
as limitations
an alternative model of to
thethestudy, conclusions,
neoclassical economy and both
discussions.
from a theoretical and practical point of view,
as it acknowledges the fundamental role of the environment, as well as its functions and the interplay
2. Literature
between the Review on Circular
environment Economy
and the economic system [7] (p. 24). The challenge of environmental
pollution, as well as the challenge of global resource scarcity, are addressed in this structure [6].
2.1. Fromthis
Through a Linear to aitCircular
system, Economy
is intended to pass from production–consumption–waste economic behavior to
a production–consumption–reuse
The CE approach had achieved one,attention
aiming not
byonly for sustainable
the second development
half of the 1970s [3]. Itthrough economica
conceptualizes
new economic system of change in business model innovation on one hand, and consumer behavior
on the other, in which, both producers and consumers focus on reprocessing, restoring, renovating,
Sustainability 2020, 12, 4831 4 of 16

sufficiency, but also environmental and social life sustainability. In [7] it is emphasized that “the
transition towards CE comes from the involvement of all actors of the society and their capacity
to link and create sustainable collaboration and exchange patterns” (p. 11). This can be achieved
through sustainable resource management, societal behavior change, and business operation models.
By promoting the adoption of closing the loop production patterns within an economic system, CE
aims to increase the efficiency of resource use, with a special focus on urban and industrial waste to
achieve a better balance and harmony between the economy, environment, and society [7] (p. 11).

2.2. From Circularity to Sustainability

The systematic literature network analysis of 1558 papers conducted by [13] define “four common
factors driving research about CE, namely: (i) the active debate about CE‘s role to reach sustainability,
(ii) the interdisciplinary background of scholars, (iii) the development agendas underpinned by CE
established by either Chinese or European governments; (iv) the importance of financial support”
(p. 1643).
Different definitions of CE are provided in the literature. Some of them have a holistic perspective
and some of them a partial one focusing more on the environmental impact of circularity. In [24], CE
is defined as recuperative, which disposes of waste through designing innovative business models
that empower enhanced material, product, and system design usage. In [25], it is suggested that
CE is defined as “an economic model in wherein planning, resourcing, procurement, production
and reprocessing are designed and managed, as both process and output, to maximise ecosystem
functioning and human well-being” (p. 369). The main aim of a circular economy is considered to
be economic prosperity, followed by environmental quality; its impact on social equity and future
generations is barely mentioned [19] (p. 221). The majority of the research on CE development focuses
on “resource scarcity and environmental impact perspective leaving economic benefits of industrial
actors in general and specifically on individual level missing” [6] (p. 46). On the other hand, [7]
see the consumer’s responsibility, along with substantial policies, as crucial for CE. They define CE
as “the adoption of cleaner production patterns at a company level, an increase of producers and
consumers responsibility and awareness, the use of renewable technologies and materials (wherever
possible) as well as the adoption of suitable, clear and stable policies and tools” [7] (p. 11).
Although sustainable development lays out the triple bottom line system, focusing on the
environmental, economic, and societal benefits as a whole, CE prioritizes the economic system,
where the main beneficiaries are the economy and environment, while societal benefits arise from
environmental improvements, manual labor, or fairer taxation [14]. Meanwhile, there are many
similarities between CE and sustainability concepts identified by [14] as (i) non-economic aspect
integration into development; (ii) different stakeholder cooperation necessity; (iii) regulation and
incentives as core implementation tools; (iv) business model innovation for industry transformation.
To satisfy the concept of sustainable development, the best possible use of all available economic
resources should be studied for the production of the maximum possible output of goods and services
that are needed for the community now and in the future, and the just distribution of this output [26]
(p. 97). While describing the attributes of a sustainable economic system, [27] mentioned it: (i) boosts
consumption reduction; (ii) contributes to social and environmental improvements; (iii) is closed-loop,
zero-waste allowance; (iv) focuses on process and experience transmission; (v) awards talents, and (vi) is
raised on cooperation and sharing. On the same line, [2] developed eight archetypes to support business
model innovation for sustainability, such as: “(i) maximise material and energy efficiency; (ii) create
value from “waste”; (iii) substitute with renewables and natural processes; (iv) deliver functionality,
rather than ownership; (v) adopt a stewardship role; (vi) encourage sufficiency; (vii) re-purpose the
business for society/environment; (viii) develop scale-up solutions” [2] (p. 55). Among the eight
options, circularity is also viewed as a means towards sustainability. In their research, [14] found that
CE “is viewed as a condition for sustainability, a beneficial relation, or a trade-off in literature” (p. 767).
Sustainability 2020, 12, 4831 5 of 16

On the other hand, [18] included sustainability as an aim to be accomplished by the CE. They defined
CE “an economic system that replaces the “end-of-life” concept with reducing, alternatively reusing,
recycling and recovering materials in production/distribution and consumption processes, [...], with the
aim to accomplish sustainable development, thus simultaneously creating environmental quality,
economic prosperity and social equity, to the benefit of current and future generations” [19] (p. 229).
Responsible consumers and business model innovation stay at the core of enabling CE, where
collaborative consumption models are perceived among the most advantageous models for consumers
to move to a CE [19]. Collaborative platforms being positioned on multiple ownerships between
consumers are continuously evolving their purchasing behavior and approaches. Inspired by the
principles of sustainable consumption, its starting point is the idea that every underutilized resource is
a wasted resource [28] (p. 1797). In [29], it is argued that these collaborative platforms of consumption
stay at the ground of CE accomplishment through an increase of employment and resource efficiency.
In this research, we adopted the definition of [19] on the CE as an economic system operating at
micro-meso-macro levels, focusing on the 4R of reducing, reusing, recycling, and recovering materials
in production–consumption activities and aiming to achieve sustainable development. Related to
the issue of CE enablers beside business model innovation and responsible consumers, we added
collaboration through the quadruple helix, too. In [30], it is argued that to achieve open innovation
micro- and macro-dynamics, a quadruple helix model is needed for social, environmental, economic,
cultural, policy, and knowledge sustainability. The quadruple helix is an extension of the [31] triple
helix spiral collaboration model of innovation between university–industry–government, which were
referred by them as a “laboratory for knowledge-based economic development.” In the quadruple helix
model, [32] recognized “media-based and the culture-based public” as a fourth helix of collaboration
by emphasizing that “culture and values, on the one hand, and the way how ‘public reality’ is being
constructed and communicated by the media, on the other hand, influence every national innovation
system” (p. 206). With an open platform, technological advancement, the mobility of highly educated
people, and societal engagement, companies can absorb knowledge resources efficiently [30] (p. 2).
Figure 1 above provides our “integrated circular economy” framework, where a sustainable
circular economy impacting social, environmental, and economic aspects can be achieved through the
support of the quadruple helix model of innovation, as explained above.
We based our proposal of this theoretical framework on the literature background, which supports
the need for a quadruple helix model to develop a sustainable circular economy. In the next section, we
will consider the details of Figure 1 (second part) devoted to the CE and the triangle of sustainability,
from which we constructed our empirical analysis.

3. Materials and Methods

3.1. Circular Economy Indicators

The concept of the circular economy has been a deliberate topic since the late 1970s [3]. In addition to
that, the impact of the circular economy on economic growth has been studied by many researchers [20].
As such, the study of [14] argued that there is a direct connection between CE and economic growth.
The authors made detailed research on the papers published from 1950 to January, 2016 with the
topics on “sustainability,” “circular economy,” and “circular economy and sustainability.” The findings
showed that there were 59,464 papers on sustainability, 295 papers on the circular economy, and
67 papers on circular economy and sustainability.
Furthermore, the CE was analyzed on both a micro-level [33–36] and macro-level [37–39]. On the
macro-level, [40] proposes some indicators to measure the CE progress throughout the EU member
countries. Referring to priority areas of the CE Action Plan in Europe [12], the monitoring framework
indicators are segregated into four group areas: (1) production and consumption, (2) waste management,
(3) secondary raw materials, and (4) competitiveness and innovation. Exploring the effects of the
CE progress on the economic growth and sustainability of the countries, especially in the European
Sustainability 2020, 12, 4831 6 of 16

Union [41], has been a prime concern of many scholars in the last few years. In their study, [42]
developed a “Circular Economy Composite indicator to benchmark EU countries performance” (p. 618).
Through this index, it aims to provide policymakers with a tool for defining the country-level strengths
and weaknesses of circular economy performance [42].
In [7], 155 papers covering circular economy are classified according to two conceptual groups
(CE models and CE principles) and according to micro-, meso-, and macro-level studies. As seen
from the results, the aggregate of all these papers implies and targets sustainable development. In the
same line, this study supports the sustainable development in the framework of the circular economy
(Figure 1, second part) considered in the macro-level analysis. In addition, it is important to mention
that sustainability and the circular economy’s impact on economic growth is not increased by a simple
shift to renewable resources or materials [6,43]. Specifically, it considers five important variables
retrieved from the Eurostat database. The definitions and specifics of each variable of our model were
consulted from the same source (see Appendix A) and listed below as such:

- Environment Tax Revenues (defined as var1)

- Recycling Rate of Municipal Waste (defined as var2)
- Private Investment, Jobs, Gross Value Added related to CE (defined as var3)
- Patents related to Recycling (defined as var4)
- Trade-in Recyclable Raw Materials (defined as var5)

The internal market factors are crucial to be considered. Thus, the variables above included
the waste management within a country, the taxation collections from producers and consumers,
the private investments and jobs related to CE, and the innovation side of CE, which is connected to
patents and open economy as well. Sustainable economic growth should be supported by different
pillars of the economy and the integration among them. The economic criteria are based on the
well-functioning and the operation of the economy in the European market [44]; thus, the integration
of all actors would bring the best outcome to the market. The circular economy covers a large range of
society, defining it as both consumers and producers. As important and vital pillars are to this support,
we proposed
Sustainability 2020,the
12, environmental
x FOR PEER REVIEWaspect, the social aspect, and the economic aspect (the triangle 7 of of
18
sustainable development). Referring to Figure 2, we categorized var1 and var2 as indicators that have
World
an impactDevelopment
on environment Indicators, whereas
dimension; the
var1, dataand
var3, forvar4
all other independent
as indicators variables
that have wereon
an impact retrieved
a social
from Eurostat.
dimension; and var1, var3, var4, and var5 as indicators that have an impact on the economic dimension.

Figure 2. Modelling
Modelling circular
circular economy in the context of sustainable growth.

The independent variable selection was also based on literature. For example, a study [45] argues
that the environmental taxes are important drivers of economic growth. Other studies, such as [6,43],
confirm the importance of recycling rates and environmental innovation in sustainable development
and economic growth. The other variable, trade, is found to have positive effects on economic growth
Sustainability 2020, 12, 4831 7 of 16

3.2. Data
Overall, we extracted five major proxies to measure the effect of circular economy innovation on
economic growth, such as environmental tax revenues, the recycling rate of raw materials, private
investment, jobs/gross value added, patents related to recycling, and trade-in recycling raw materials.
The choice of the variable selection is based on two strategies. First, it is decided that these indicators
have a strong reflection of circular economy innovation, which is based on a literature survey. Second,
it is also ensuring that these five major proxies-related data must be available across EU28 countries.
Regarding the source of the data, we extracted these variables from the Eurostat for EU28 countries.
Concerning the economic growth, we used GDP per capita. GDP per capita measures economic
growth more efficiently than simply using the total national output (GDP). In order to examine the
link between economic growth and the main components defining circular economy, we used panel
data analysis. The regression equation was performed for EU28 by considering the panel data from
2000 to 2017. Data for the dependent variable, GDP growth (GDP per capita), were retrieved from
World Development Indicators, whereas the data for all other independent variables were retrieved
from Eurostat.
The independent variable selection was also based on literature. For example, a study [45] argues
that the environmental taxes are important drivers of economic growth. Other studies, such as [6,43],
confirm the importance of recycling rates and environmental innovation in sustainable development
and economic growth. The other variable, trade, is found to have positive effects on economic growth
and sustainable development [25,46].
Based on Figure 2, we extracted three variables to estimate the effect of the circular economy
on economic growth. These variables were environmental, social, and economic impacts and they
were interrelated with each other (overlapping). More precisely, to measure the environmental impact
on growth, we used two proxies, such as environmental tax revenues and the recycling rate of
municipal wastage. In order to investigate the social impact on growth, we added two additional
indicators: “patents-related recycling” and “private investment gross value added.” Lastly, to measure
the economic impact, trade-in recycled raw materials were included combined with environmental
and social impacts. In summary, Figure 2 shows that environmental, social, and economic factors are
the key proxies of the circular economy.
In addition, we introduced a new variable labelled as the innovation, which was the multiplication
of two variables: that of “private investment, jobs, gross value added related to CE” and “patents related
to recycling.” As argued by the study of [47], there is a direct link between labor force, investment,
employability, and innovation. In addition, most researchers have achieved agreement on the necessary
function of the patent system in promoting innovation [48]. Lastly, [49,50] confirm that innovation in
the recycling sector is crucial for GDP growth. Hence, based on the literature and as we proposed
in the conceptual framework of integrated circular economy (Figure 1), the sustainable development
triangle has to be supported by innovation. Table 1 shows the summary statistics of all variables before
the regression analysis. If we compare the median and mean per each component, we reveal that the
values are close to each other. This supports the fact that the selected data for our model followed a
normal distribution [51].
For some additional information on the dataset, we have included the full data in the boxplot
(Figure 3). The variable of innovation did not show outliers in its dataset. In the meantime, the dataset
on taxes, recycling, and trade had a few outliers that were not problematic for our sample. However,
considering GDP, the dataset included some outliers from both sides, which might be the effect of not
taking its logarithmic values. As stated above, all these variables were normally distributed.
Sustainability 2020, 12, x FOR PEER REVIEW 8 of 18

Table 1. Descriptive statistics.

Sustainability 2020, 12, 4831 8 of 16
Variable Variable Definition* Observ. St. Dev. Min Max Mean Median
Gdp GDP per cap. growth (annual %) 504 3.710 -14.560 23.985 2.219 2.0981
Tablein1. Descriptive statistics.
Log (Proportion of env. tax revenues
log_tax 502 0.221 0.457 1.6094 0.941 0.9321
GDP)
Variable Log (Recycling
Variable Definition *
Rate of MunicipalObserv. St. Dev. Min Max Mean Median
log_rec 487 1.028 -1.609 4.214 2.973 3.2847
GDP perWaste)
cap. growth
GdpLvog (Priv. Inv., Jobs, Gross Val. Add.504
x 3.710 −14.560 23.985 2.219 2.0981
log_innov (annual %) 145 2.817 1.784 14.818 9.634 9.6001
Patents related to Recycling)
Log (Proportion of env.
log_tradelog_tax Log (Trade in Recycl. Raw Mat.) 502 3920.221 2.407 0.457 0.693 1.6094 14.493 0.941
10.864 0.9321
11.3897
tax revenues in GDP)
Log (Recycling Rate of
log_rec 487 1.028 −1.609 4.214 2.973 3.2847
Municipal Waste) * Details are found in Appendix A
Lvog (Priv. Inv., Jobs,
Forlog_innov
some additional
Gross Val.information
Add. x Patentson the145dataset, we have1.784
2.817 included14.818
the full data
9.634 in the9.6001
boxplot
related
(Figure 3). The variable to Recycling) did not show outliers in its dataset. In the meantime, the dataset
of innovation
on taxes, Log (Trade
recycling, and trade in Recycl.
had a few outliers
log_trade 392 that 2.407
were not problematic
0.693 for our10.864
14.493 sample. However,
11.3897
Raw Mat.)
considering GDP, the dataset included some outliers from both sides, which might be the effect of
* Details are found in Appendix A
not taking its logarithmic values. As stated above, all these variables were normally distributed.
20
10
0
-10
-20

GDP log_tax
log_rec log_innov
log_trade

Figure
Figure3.3.Visualized
Visualizedsummary statistics
summary with
statistics boxplot.
with boxplot.

Figure 4 shows
Figure shows the
thescatterplot
scatterplotofofGDP
GDPwithwitheach variable.
each AsAs
variable. observed, there
observed, were
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were concentrated
datasets for recycling
datasets recycling and
andtrade.
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Asper
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other two variables, taxtax
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with the GDP
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be the
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whichis is
slightly positive.
slightly positive.
As a second step, we found the results shown from the correlation matrix for testing the
multicollinearity. The Pearson correlation matrix helped us to identify whether there were highly
correlated variables among them. According to [52], the presence of high correlation—generally
accepted 0.90 and higher—is the first indication of substantial collinearity. As found for our results, we
did not have high correlations; thus, we concluded that we did not have multicollinearity problems
within our variables. In order to examine the effect of circular economy innovation on economic
growth, we used two models: i.e., the fixed effect model and the system GMM [23]. In the fixed model,
we investigated the impact of circular economy proxies on economic growth without addressing the
endogeneity problem. However, this strategy allowed us to check the strength (coefficients) and the
direction (positive/negative) of each proxy on economic growth. To remove the endogeneity problem,
system generalized methods of moments (GMM) provided more efficient coefficients than simply
using an ordinary least square (OLS). Through this estimation, the model used an instrumental variable
(lagged one period) of the dependent variable (GDP per capita). In other words, the motivation to use
system GMM was based on three reasons: first, system GMM somewhat addresses the causality due
to the link between circular economy indicators and the GDP growth. Second, the fixed effect—e.g.,
demographic characteristics (size and growth) of each EU country might have a correlation with the
Sustainability 2020, 12, 4831 9 of 16

unobserved factor. Third, system GMM works even with a small sample size (N = 100, 50, 35) and
Sustainabilityefficient
produced 2020, 12, xcoefficients [53].
FOR PEER REVIEW 9 of 18
20

20
10

10
GDP

GDP
0

0
-10

-10
-20

-20
.5 1 1.5 -2 0 2 4
log_tax log_rec

20
20

10
10

GDP
GDP

0
0

-10
-10

-20
-20

0 5 10 15 0 5 10 15
log_innov log_trade

Figure 4. Scatterplot
Scatterplot of GDP and other variables.

4. Results
As a second step, we found the results shown from the correlation matrix for testing the
multicollinearity.
A preliminary ThetestPearson correlation
to our model should matrix
be thehelped
Hausman us totest.
identify whether
This test shows there were highly
us which model
correlated variables the
should be selected: among
randomthem. According
effect model or tothe[52], the one.
fixed presence
As such,of high
we set correlation—generally
up the null and the
accepted
alternative0.90 and higher—is
hypothesis, the first
respectively. The indication of substantial
null hypothesis, collinearity.
H0, indicated that the Asmode
foundwasforwith
our random
results,
we didand
effects, notthe
have high correlations;
alternative one, H1, stated thus,thewe concluded
rejection that we
of random did thus,
effects, not have multicollinearity
showing that the fixed
problems
effect is thewithin our variables.
appropriate model for Inourorder to examine the effect of circular economy innovation on
case.
economic
As wegrowth,
ran thewe used two
Hausman test,models:
we found i.e., out
the that effect>model
fixedProb. Chi2 =and the system
0.0001, meaning GMM
that we[23]. In the
rejected
fixed model,
the null we investigated
hypothesis in favor of thetheimpact of circular
alternative one. economy
Consequently, proxies a on economic
fixed growth
effect (FE) without
method was
addressing
appropriate the endogeneity
for our analysis. problem. However, this strategy allowed us to check the strength
(coefficients)
Based onand thethe direction
Hausman (positive/negative)
test value, Equation (1) of each
shows proxy on economic
the equation for our growth.
panelTo remove
data the
analysis.
endogeneity
We problem, system
used the logarithmic valuesgeneralized
for our variablesmethods of moments
to have compatible (GMM) numbers provided
with more efficient
the regression
coefficients than simply using an ordinary
process. Our FE analysis has the following form: least square (OLS). Through this estimation, the model
used an instrumental variable (lagged one period) of the dependent variable (GDP per capita). In
other words, thegdp i,t = α0 + α
motivation to1 log
use + α2 log
taxsystem
i,t GMM α3 log
reci,t +was based + αthree
innovi,ton 4 logtrade + αi +
reasons:
i,t
 system GMM
first, (1)
somewhat addresses the causality due to the link between circular economy indicators and the GDP
where: Second, the fixed effect—e.g., demographic characteristics (size and growth) of each EU
growth.
i = used
country mightfor number
have of countries
a correlation with the unobserved factor. Third, system GMM works even with
t =sample
a small used forsize
time(N(of panel
= 100, 50,data timeproduced
35) and period) efficient coefficients [53].
α0 = used for the interception of the regression
αi = used for individual specific effect
4. Results
ε = used for the error term
A preliminary test to our model should be the Hausman test. This test shows us which model
should be selected: the random effect model or the fixed one. As such, we set up the null and the
alternative hypothesis, respectively. The null hypothesis, H0, indicated that the mode was with
random effects, and the alternative one, H1, stated the rejection of random effects, thus, showing that
the fixed effect is the appropriate model for our case.
Sustainability 2020, 12, 4831 10 of 16

logtax = used for environment tax revenues

logrec = used for recycling rate of municipal waste
loginnov = used for private investment, jobs, gross value added related to CE * patents related
to recycling
logtrade = used for trade in recyclable raw materials
Table 2 reports the details of the fixed effect estimation method and the significance of the variables.
All the independent variables positively affected the GDP growth per capita of the EU countries.
Three of the variables were found to be significant. Specifically, environmental tax revenues and the
recycling rate of municipal waste were significant at the significance level of 0.01. The other variable,
defined as innovation, had a significance level of 0.1. Meanwhile, trade in recyclable raw materials
was found to be insignificant.

Table 2. Fixed effect panel data method.

Economic Growth [(GDP Per Capita)] EU Countries

Environmental Tax Revenues 11.6908 ***
[L1.log_tax] (4.0962)
Recycling Rate of Municip. Waste 2.4378 ***
[L1.log_rec] (0.7476)
Innovation (Priv. Invest, Jobs in CE * Patents related Recycling) 0.6854 *
[L1.log_innov] (0.4235)
Trade in Recyclable Raw Mat. 0.0863
[L1.log_trade] (0.5874)
R-sq. (overall) 0.0029
F-Stat 10.80 ***
Rho 0.7460
Observations 135
Nb. of Groups 23
*** p < 0.01; * p < 0.1. Robust standard errors are in parentheses ( ).

As we previously stated, the panel data used were conducted for 28 countries of the EU but
because of some missing data, the number of countries was reduced to 23 (refer to Table 1, number of
groups). The F-Stat was found to be significant, supporting the overall model significance, too.
Specifically, according to the results, environmental tax revenues were found to have a positive
effect on the model. With one unit increase in environmental tax revenues, the GDP growth is likely
to increase by 11.69 units (EU28). In other words, environmental tax revenues are an important
indicator that have a positive and significant association with economic growth. The recycling rate of
municipal waste was found to be significant for EU28 and positively impacted the GDP per capita.
It should be mentioned that the significance level was within 1%. This variable was categorized as
waste management, which is directly related to the municipality. For each unit increase in the recycling
rate of municipal waste, we expected an increase of 2.43 units in the GDP per capita for the European
countries. This result showed that municipality management is being considered as a crucial factor in
economic growth.
On the other hand, the variable indicating the innovation capacities of EU countries, composed
by two subcategories—that of “private investment, jobs, and gross value added related to CE” and
“patents related to a circular economy”—was positively and significantly (at a significance level of 10%)
associated with the GDP per capita of European countries. Thus, for one unit increase in innovation,
GDP per capita increased by 0.68 units (EU28). This variable was selected as an indicator of both social
and economic impact. Hence, we confirmed that both the social aspect and economic aspect of the
circular economy were roughly significant and highly important dimensions for economic growth.
Surprisingly, even though the trade in recyclable raw materials is positively associated with GDP
per capita, the model could not confirm it due to its insignificance. This was a surprising result given
Sustainability 2020, 12, 4831 11 of 16

that trade in recyclable raw materials is considered one of the most important dimensions in economic
growth. Consulting the definition of Eurostat of this variable, “trade-in recyclable raw materials”
measures the intra-EU and extra-EU imports and exports. Thus, based on the results, it seems that
the existent trade volume does not have significant capacities to influence EU economic growth, even
though, based on the Gravity model, it is expected that the volume of trade among EU countries will
be highly extensive [54]. We can support this result by highlighting the waste management within
countries itself, rather than trading them to other countries.
In the meantime, the estimation method used in this study, fixed effect, is criticized by the general
literature. For example, [22] have presented twelve limitations and misapplications of fixed effect
models. Hence, even though the sample size might be large enough, the fixed effect method can be
biased and usually downward. Therefore, in order to better consider the effects of the independent
variables to the dependent one in our model, we used the GMM, using the Arellano–Bond conditions,
which at the same time was the most robust one [23]. The GMM estimation method is used to estimate
dynamic panel data models, based on a model in first differences. This method is used to solve the
endogeneity, heteroscedasticity, and serial correlation problems. Our GMM, using the Arellano–Bond,
has the following form:

∆gdpi,t = ∆gdpi,t−1 + α1 ∆logtaxi,t + α2 ∆logreci,t + α3 ∆loginnovi,t + α4 ∆logtradei,t + ∆i,t (2)

where:
i = used for a number of countries
t = used for time (of panel data time period)
ε = used for the error term
∆gdp = used for gross domestic product
∆logtax = used for environment tax revenues
∆logrec = used for recycling rate of municipal waste
∆loginnov = used for private investment, jobs, gross value added related to CE * patents related
to recycling
∆logtrade = used for trade-in recyclable raw materials
Thus, when computing the Arellano–Bond dynamic panel data estimation method (refer to Table 3),
we found similar results with the FE method. In both of the models, we used lag1, assuming that the
selected variables would show their effect on economic growth at least one year later. The environment
tax revenues and recycling rate of municipality waste were found to be significant at a 1% significance
level, and positively affected the GDP growth. On the other hand, the variable of innovation was
found to be within some limits of significance (a significance level of around 20%), but, again, it could
be accepted as significant and positively contributing to economic growth. Lastly, consistent with
the results of the FE method, we could not support the impact of the trade factor, even though it is a
positive one.
In addition, the overall model was found to be significant as well (Prob > chi2). Being a robust
method, GMM supported our results and confirmed once again all the circular economic factors we
included in the model to explain the sustainable economic growth of EU countries.
Sustainability 2020, 12, 4831 12 of 16

Table 3. Arellano–Bond dynamic panel data estimation method.

Economic Growth [(GDP Per Capita)] EU Countries

GDP per capita −0.0814
[L1.gdp] (0.0749)
Environmental Tax Revenues 15.6481 ***
[L1.log_tax] (3.3311)
Recycling Rate of Municip. Waste 1.6581 ***
[L1.log_rec] (0.5499)
Innovation (Priv. Invest, Jobs in CE * Patents related Recycling) 0.4267
[L1.log_innov] (0.3657)
Trade-in Recyclable Raw Mat. 0.4621
[L1.log_trade] (0.4599)
Wald chi2(5) 55.71
Prob > chi2 0.0000
Number of instruments 89
Observations 101
Nb. of Groups 22
*** p < 0.01; * p < 0.1. Robust standard errors are in parentheses ( ).

5. Discussion and Conclusions

Through this research, we aimed to identify the CE components supportive of sustainability
with a positive impact on economic growth. We defined CE as an economic system operating at
micro-meso-macro levels, focusing on the 4R of reducing, reusing, recycling, and recovering materials
in production–consumption activities, aiming to achieve sustainable development, enabled by business
model innovation and responsible consumers, and supported by the quadruple helix collaboration.
Analyzing the results of both the fixed effect panel data method and the Arellano–Bond dynamic
panel data estimation method, we can state that the results match with each other and all the selected
indicators positively impact EU economic growth in the EU member states. As such, all the variables
are significant except for the trade factor. The results of the paper are consistent with some other recent
studies [21,29], in which the authors developed regression models to explain the economic growth
explained by similar variables related to CE for EU member states. In the first study, that of [21],
circular material, municipal waste, the trade of circular materials, labor productivity, environment tax,
and resource productivity were all significant and positive to economic growth. The second study [20],
resource productivity, recycling rate, environmental employment, and environmental innovation were
all important to the GDP growth of EU countries. The novelty of our study is the categorization of
variables based on the sustainable economic development triangle adopted for the circular economy
(environmental—social—economic) and the examination of their effect of economic growth. To sum
up, the study strongly confirmed the importance of the three components of the circular economy to
economic growth for the case of EU28.
The results of both models used to determine the linkage between CE and EG highlight important
results. The outcomes could be linked to other studies, which argue that environmental taxes are
important drivers of economic growth [45]. Other studies confirm that the importance of recycling rates
and environmental innovation are also significant factors of sustainable development and economic
growth [6,43]. The significance of innovation in the recycling sector is supported by other studies
that validate it as an essential factor in GDP growth [49,50]. Similarly to [25] and [46], our results
concluded that the trade of recyclable raw materials has a positive impact on economic growth and
sustainable development; however, contradictory to these studies, in our models, we could not confirm
its significance.
Sustainability 2020, 12, 4831 13 of 16

This study strongly endorses the fact that the circular economy should be supportedby the
main actors of sustainable economy supports—the quadruple helix model of innovation—academia,
government, business, and civil society. We use the term innovation because the circular economy
itself is based on the fundamentals of innovation that make the sustainability triangle essential to
economic growth. Moreover, the validation of all our hypotheses revealed the relationship between the
circular economy factors and the need for collaboration among the quadruple helix model to support
that the improvement of economic indicators is important to implement and advance circularity, which
significantly contributes to economic growth.
Briefly, we can conclude that:

(1) all CE indicators considered in this study are found to positively affect economic growth;
(2) if the CE indicators are associated with the sustainable economic development triangle adopted
for the circular economy (environmental–social–economic), the findings show that they have a
positive effect on economic growth as well;
(3) theoretically and empirically based, the study underpins the necessity of innovation in the core
of CE;
(4) this study emphasizes and strongly supports the stipulation of the collaboration among academia,
government, business, and civil society.

The results of this study could be useful to policymakers and authorities that are engaged with the
growth and development policies and implementation of the right structures and targets of relevant
innovation. However, the used regression analysis could be further improved by adding other control
variables and adding a longer time period. Another suggestion for future research could be the
implementation of such models in a larger number of countries and making some comparisons among
EU and non-EU countries.

Author Contributions: Conceptualization, E.H. and A.K.; methodology, E.H., A.K., and N.U.R.; software, E.H.,
and N.U.R.; validation, formal analysis, and investigation all authors; resources, E.H. and A.K.; data curation, E.H.,
and N.U.R.; writing—original draft preparation, E.H. and A.K.; writing—review and editing, and visualization,
all authors; supervision, E.H.; project administration, E.H.; funding acquisition, R.L. All authors have read and
agreed to the published version of the manuscript.
Acknowledgments: R.L. acknowledges the financial support from the CE@KTH initiative.
Conflicts of Interest: The authors declare no conflict of interest.

Appendix A
Eurostat Definitions of CE indicators (both, Consumer and Producer side)
Environment Tax Revenues: The indicator is presented as the proportion of environmental tax
revenues in gross domestic product (GDP). It is considered as a market internal factor which includes
the contribution of all actors, such as consumers and producers, to the circular economy.
Municipality (Waste Management)
Recycling Rate of Municipal Waste: The indicator measures the share of recycled municipal
waste in the total municipal waste generation. Recycling includes material recycling, composting, and
anaerobic digestion.
Innovation
Private Investment, Jobs, Gross Value Added related to CE: The indicator includes: the gross
investment in tangible goods, the number of persons employed, and the value-added at factor costs
in the following three sectors: the recycling sector, the repair and reuse sector, and the rental and
leasing sector.
Patents related to Recycling: The indicator measures the number of patents related to recycling
and secondary raw materials. The term ‘patents’ refers to patent families, which include all documents
relevant to a distinct invention (e.g., applications to multiple authorities), thus, preventing multiple
counting. A fraction of the family is allocated to each applicant and relevant technology.
Sustainability 2020, 12, 4831 14 of 16

Open Economy
Trade-in Recyclable Raw Materials: The indicator measures the quantities of selected waste
categories and by-products that are shipped between the EU member states (intra-EU) and across the
EU borders (extra-EU). The indicator includes the following variables: “intra-EU trade of recyclable
raw materials (measured as the Imports from EU countries),” “imports from non-EU countries and
exports to non-EU countries of recyclable raw materials (as regards extra-EU trade).

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