This paper analyses the relationship between circular economy (CE) innovation and firm performance using a unique firm-level dataset integrating financial indicators, strategic variables and CE-related patent technologies identified via machine learning techniques. The focus is on Italian manufacturing firms during the 2019-24 period. 

The study combines descriptive analysis and econometric methods (probit analysis, propensity score matching techniques, Heckman selection model) to investigate both the determinants of firms’ involvement in CE activities and the impact of such innovation on financial KPIs, with a focus on productivity. Results show that firms patenting in CE display a more advanced strategic profile, with stronger internationalization, greater adoption of renewable energy and broader sustainability-oriented practices. 

Moreover, circular firms proved to be resilient to macroeconomic shocks in 2019-24, by maintaining stable margins and showing higher levels of capitalization and labour productivity with respect to non-circular firms. Econometric estimates suggest a positive association between CE innovation and productivity growth, but the effect becomes statistically insignificant when controlling for firm heterogeneity through matching techniques. 

Overall, the findings highlight that circularity is embedded in broader strategic and organizational skills at the firm level, which are important for calibrating future interventions that can trigger a virtuous cycle of growth for the national economy.