Assessing the Viability of Circular Economy in Indonesia's MSMEs Agribusiness Sector

Current global environmental challenges emphasise the importance of embracing the circular economy. The circular economy is an economic model that prioritises reducing, reusing, and improving materials throughout the product life cycle, from production and distribution to consumption [1, 2]. This approach can be applied at multiple levels – micro (by companies and consumers), meso (in green industrial estates), and macro (in cities, regions, and countries) – to build a sustainable economy that focuses on environmental quality, economic well-being, and social justice. Only nine per cent of the world's economic activity is based on circular economy principles [3]. In contrast, a linear growth-oriented economic system is closely linked to environmental problems such as deforestation, biodiversity loss, climate change, floods, and pollution (water, soil, and air) resulting from overexploitation and exceeding environmental capacity in both input and output supply chains. The circular economy offers solutions to the problems caused by the linear economy [4].

The circular economy concept focuses on forming an industrial economy that produces minimal waste by utilising two materials: biological materials that can be returned to nature without causing damage and technical materials that can be continuously reused without generating waste [5, 6]. Sustainability is essential for the proper functioning of the circular economy, as it allows for long-term survival. Certain parties need to initiate the formation of a circular economy mechanism. Implementing a circular economy can help mitigate the negative impact of various industries that previously operated under a 'business as usual' model [7]. The agribusiness industry is responsible for the global implementation of the circular economy. Unfortunately, the industry is also one of the main contributors to pollution, after the oil and textile industries. According to global data, agribusiness, particularly the processed food industry, accounts for 15% of global wastewater (water pollution) and 15% of total global carbon emissions (air pollution) [8, 9]. Processed food products end up in solid waste, contributing to 118 million tonnes in landfills, which comprise 74% of total production waste and are buried or burned [10, 11]. Considering this vast negative impact, there is an urgent need to implement a circular economy in agribusiness, especially in producing processed agricultural products.

Indonesia's food processing sector is an integral part of the country's strategy to build a circular economy by 2030. This effort is projected to increase Indonesia's GDP by 2.5%, create 4.4 million jobs, and reduce production waste by up to 40% [8, 9]. Almost all businesses in Indonesia, 62.5 million, are MSMEs, with the trade sector being the largest share. MSMEs contribute 60% to Indonesia's GDP and play an essential role in the country's economy [9]. Indonesia's Coordinating Ministry for Maritime Affairs has set a goal for Indonesia to transition to a developed country, with 14% of the population involved in entrepreneurial activities. In addition, the unemployment rate in Indonesia is reported to reach 6.31% [12].

Entrepreneurship has a vital role in encouraging economic expansion. Entrepreneurship can spur economic progress by creating jobs, increasing incomes, and improving the overall quality of life. This underscores the importance of MSMEs in entrepreneurship because MSMEs are the economic foundation of a region and contribute to growth and job creation [11]. Improving the quality of human resources and capital will increase revenue, labor costs, market share, and profits. Unlike when company longevity was the main driver of revenue with high labor costs and minimal profits, revenue growth now brings considerable increases in labor costs, market share, and profits [9]. Higher income levels provide more significant opportunities for MSMEs to build a circular economy.

The concept of sustainability can be understood through three main aspects: object, goal orientation, and interaction. "Object" refers to a sustainable object or a concrete representation of sustainability. Goal orientation describes the starting point for assessing whether an object or thing is sustainable. This orientation can be absolute or relative, but it is essential to understand the ways and factors that affect sustainability. The relative approach involves identifying current conditions and problems that need to be addressed and gradually improved to achieve sustainability [13, 14]. The third aspect, interaction, involves whether the observed object is static or dynamic. This aspect is based on the idea that external forces and internal factors can cause the observed object to change. From a static perspective, external factors are considered static, even though the analysed object is dynamic.

The Sustainability Indicator System analysis concentrates on the evaluation of sustainable business performance. This study is beneficial for understanding the intricacies of small-scale businesses, especially in the agribusiness sector. Improving inputs, processes, and outcomes is critical to driving business expansion. Difficulties such as obtaining capital and human resources are also important issues. Using a 'Knowledge Transfer' approach, this study aims to find strategies that small business owners can adopt to address similar businesses' economic, social, and environmental challenges.

Implementing the circular economy is particularly concerning in MSMEs, as these companies have faced much criticism for their lack of environmental priorities, inefficient use of resources, and weak compliance with ecological management initiatives [15]. Several research studies have investigated the barriers and supporting factors faced by MSMEs when implementing circular economy practices [14, 16-21]. Chowdhury et al. [22] researched the impact of circular economy innovation, which has more risks than conventional innovation, caused mainly by misinterpretation of the circular economy business model. Furthermore, Chakraborty et al. [23] and D'Amato et al. [24] emphasised the importance of technological advances for effectively applying circular economy principles. Nevertheless, the existing studies have primarily focused on the context of developed countries, with few studies addressing developing countries in this context. In addition, the existing literature is still about applying Circular Economy principles in MSMEs in general. This study refines the current literature by identifying the main factors that facilitate or hinder the adoption of circular economy practices by MSMEs, and it also analyses the Manufacturing Sustainability Indicators that have implemented circular economy in agribusiness MSMEs. Studies related to the Circular Economy on agribusiness MSMEs are still minimal, so the impact of this study provides valuable insights for Agribusiness MSME policymakers and stakeholders in increasing the adoption of the circular economy in Indonesia. The circular economy research gap in agribusiness MSMEs revolves around the need to thoroughly understand how circular economy metrics are interconnected and impact regeneration-related choices.

This study aims to evaluate the importance of the Remanufacturing Sustainability Indicator (RSI) for MSMEs in the agribusiness sector and analyse the factors that affect agribusiness MSMEs in adopting circular economy principles. This research is structured based on three main concepts: understanding the research background to identify essential factors in developing sustainability indicators for MSMEs, establishing sustainability indicators for MSMEs by considering the measurement method and scope, and discussing the measurement and framework of sustainability indicators for MSMEs. The goal is to develop a framework of sustainability indicators for agribusiness MSMEs that can guide agribusiness MSMEs in Indonesia and other developing countries. With its potential to assist in monitoring and assessing the impact of circular economy activities at various stages, this framework can be an essential step towards facilitating the production of sustainable, high-performance products derived from remanufactured products throughout their life cycle.

3.1 Agribusiness MSMEs implementing circular economy principles

In this study in Figure 2, various MSMEs, including small, micro, and medium enterprises, have adopted circular economy principles based on their income groups. Of the 650 agribusiness MSMEs sampled, 186 have applied circular economy principles. Of these, 120 have continued the circular process with others, and 66 have managed the rest of their production. The findings regarding the characteristics of agribusiness MSMEs that apply circular economy practices are as follows: their income is not affected by economic conditions; no MSMEs received credit related to circular economy programs; MSMEs are located on the outskirts of the city, away from crowds; and the adoption of circular economy principles initiated by employees who are looking for alternative methods to utilize leftover production.

The 66 agribusiness MSMEs with a higher level of involvement in reusing their production cycles have similar characteristics, such as having the lowest income among their competitors, operating under the same legal entity, located relatively close to the central government office in the Central Java region, owned by men, and run by relatively young MSME owners.

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Figure 2. Agribusiness MSMEs implementing circular economy in Central Java

3.2 Agribusiness MSME sustainability indicators

3.2.1 RSI

RSI of agribusiness MSMEs that have adopted circular economy principles shows minimal variability in various aspects. This implies that the difference in RSI values among Agribusiness MSME respondents is insignificant. However, indicators such as job creation, employee wage increases, and skilled labor have relatively high variability. This indicates a diversity of RSI values among agribusiness MSMEs (see Table 2).

The findings in Table 2 show that when agribusiness MSMEs adopt circular economy principles, they positively influence various areas, including job creation, employee welfare, production efficiency, work quality, and environmental management. Promoting and advancing the use of circular economy principles is essential to ensure the expansion and sustainability of MSMEs, which will bring comprehensive benefits to MSMEs, society, and the environment.

In Table 2, agribusiness MSMEs that apply circular economy principles generate an average net profit of Rp. 602,987,710 while maintaining a high level of material acquisition and productivity. This shows efficient utilisation of resources and effective control of production costs. Economic, social, and environmental indicators in the RSI value of agribusiness MSME respondents who have applied circular economy principles are higher than those who have not. For example, the average value for the job creation indicator is 13.92%, with a maximum value of 120%. This shows significant potential for agribusiness MSMEs to create jobs by applying circular economy principles. The salary increase of 7.12% among agribusiness MSME respondents indicates that salary growth in agribusiness MSMEs oriented towards the circular economy exceeds the average salary increase rate among other MSMEs in Indonesia. This increase is below the average level of job creation in the manufacturing industry. However, as noted by Anzules-Falcones et al. [28], an increase in the number of MSMEs will undoubtedly contribute substantially to job creation.

Economic indicators when applying circular economy principles. This includes increasing productivity and reducing production costs to increase net profit and improve business sustainability. Despite the high average cost of production, there is still potential to increase productivity. Therefore, agribusiness MSMEs in Central Java need to consider these economic factors, such as increasing productivity and reducing production costs, to strengthen business sustainability and increase net profit. By optimising opportunities through circular economy principles, these efforts can contribute positively to the economy in Central Java by creating jobs. According to Palacio et al. [34], the circular economy principle can increase employee salaries, reduce waste treatment costs, and create jobs. In addition, research results from previous study [1] show that businesses engaged in remanufacturing should focus on improving various aspects to ensure the sustainability of their operations.

Table 2 presents the RSI values for social indicators related to employees and society. According to the table, the incidence of work accidents among employees is relatively low, with an average of only 8.18%. On the contrary, labor productivity shows a relatively high average of 12.21%. In addition, 42.21% of the skilled workforce stated the need to improve their skills to improve the company's productivity and performance. Complaints from the community side are very minimal, on average only 0.8%.

Nevertheless, these complaints indicate that the company must address issues related to improved relationships with the surrounding community and business practices. Customer satisfaction is at 0.16. To increase productivity, reduce the risk of work accidents, and improve the company's reputation, MSMEs should focus on upskilling the workforce through training programs and community relations by participating in local events or supporting community initiatives.

Comparing the rate of industrial work accidents in Indonesia will give us a better understanding of how the industry performs in terms of occupational safety. Job-related incidents in respondents' MSMEs, such as minor injuries, are rare. However, it is essential to note that the high rate of work accidents can lead to additional costs and legal problems [35]. Therefore, reducing work accidents benefits employees, companies, and society and is also a critical factor in creating a safer working environment and cost savings. On the other hand, the productivity of small and micro enterprises in Indonesia still needs to be increased to reach around 50% of the productivity of medium and large enterprises (150%). This shows that agribusiness MSMEs that implement a circular economy provide added value up to seven times the total cost of the average worker. This can be influenced by various factors, such as working hours exceeding eight hours per day, the use of new production equipment [36], and some MSMEs that continue to produce on weekends.

Agribusiness MSMEs have a high proportion of trained workers, which are obtained through quality education and support from government and private initiatives that promote workforce skill development. Improving the workforce's skills can lead to a decrease in the unemployment rate and an increase in productivity in the industrial sector. Tsai et al. [37] state that a lack of skilled labor can hinder the growth and sustainability of a company. Therefore, agribusiness MSMEs in Indonesia need to increase the presence of skilled employees who are an integral part of this business and whose role is highly valued.

The number of complaints from Agribusiness MSME customers is relatively low. Most customer complaints are about defective products, including minor issues that can significantly impact the efficiency of agribusiness MSMEs. According to research conducted by Mukherjee et al. [38], public complaints and complaints can negatively impact a company's reputation and reduce customer trust, potentially leading respondents to provide biased answers. However, overall customer satisfaction is high because, on average, MSME products meet consumer expectations.

Table 2 shows the environmental indicators related to material efficiency. This indicates that lower material acquisition values result in better environmental impact, as seen in the 14.19 kg value. The RSI value for acquiring used materials was 8.46 kg, and the intensity of solid waste was 6.28 kg. The lack of material use causes the low RSI value in environmental indicators, so the impact on natural resources and the environment is minor. Therefore, agribusiness MSMEs must focus on reducing the amount of materials used in production by implementing recycling practices and using environmentally friendly materials.

Table 2. Agribusiness MSMEs of Remanufacturing Sustainability Indicators

Agribusiness MSMEs in Central Java must focus on six ecDue to various factors, MSMEs often need help to reuse their remaining production. Commercial banks provide MSME loans in the water supply, waste management, and waste recycling sectors, as noted by Abdullah [1] and in a study by Inoue et al. [6] which highlights that credit plays a vital role in supporting circular economies, especially in developing countries. Therefore, the critical role of financial institutions in providing credit that is in line with the principles of the circular and sustainable economy cannot be overstated. Zhang et al. [39] also indicate the potential for a positive relationship between the circular economy and sustainable finance. Therefore, offering credits that prioritise environmental sustainability can encourage the reuse of production and contribute to environmental and social sustainability.

The RSI value, a measure of the circularity of a business model, for environmental indicators shows that these indicators can help MSMEs improve their sustainability. By concentrating on using materials and reducing their operations' environmental impact, MSMEs can build a good reputation with an increasing number of environmentally conscious consumers. In addition, by minimising the use of materials, MSMEs can cut production costs and improve overall business efficiency [28]. However, feedback from survey participants shows that the absence of training and certification for MSMEs is an essential factor that hinders the implementation of circular economy initiatives at large. Although two MSMEs have adopted a circular economy approach due to their employees' desire to pursue opportunities, difficulties in driving business sustainability must be overcome by increasing MSMEs' understanding and ability to embrace circular economy principles.

3.2.2 Comparison of RSI value of agribusiness MSMEs with Indonesia standardization

The results presented in Table 3 show that the average RSI value of agribusiness MSME participants consistently exceeds national standards in various indicators.

The data from Table 3 shows that Indonesia has a higher job creation rate than the national average, which shows the positive influence of agribusiness MSMEs in creating job opportunities. The manufacturing sector also showed a higher rate of job creation, exceeding the national average, highlighting the role of agribusiness MSMEs in contributing to industrial growth and employment. In addition, agribusiness MSME respondents experienced a more significant wage increase than the provincial and national minimum wage. The low rate of work accidents shows the importance of work safety measures by the MSMEs surveyed. In addition, higher productivity levels among small and medium-sized enterprises, which exceed the national average, indicate efficient utilisation of resources and effective business operations. These findings underscore the commendable performance of agribusiness MSMEs in various areas, including job creation, wage growth, profitability, occupational safety, productivity, and professional development. Overall, the comparative results show that MSME respondents have shown strong performance and have exceeded national standards in various aspects, highlighting the potential and contribution of agribusiness MSMEs in supporting economic growth, job creation, improving employee welfare, increasing productivity, and ensuring workplace safety. It is essential to focus on strengthening and expanding the development of agribusiness MSMEs to strengthen Indonesia's micro, small, and medium business sectors.

Table 3. RSI value of agribusiness MSMEs compared to national standardization

*Standardization: BPS (2022); Ministry of Labor and Transmigration (2020); Ministry of Cooperatives and MSMEs (2020)

3.2.3 RSI ratio of agribusiness MSMEs

The ratio scale was chosen because of its ability to provide comprehensive and precise information when measuring certain variables, such as the RSI value. To use a ratio scale, it is crucial to measure a quantitative variable using comparable units and determine the ratio between the variable value and the significant zero point, as shown in Table 4. Agribusiness MSMEs that implement a circular economy are divided into processed food and non-processed food MSMEs.

Identification of the category of processed food MSMEs is a type of business that produces food and beverage products that consumers directly consume. In contrast, non-processed MSMEs produce raw material products that can be reprocessed into food products and goods.

Table 4. Scale ratio of agribusiness MSMEs implementing circular economy principles

Table 4 presents the RSI values for both categories of agribusiness MSMEs that apply circular economy principles, mainly processed and non-processed food MSMEs. Processed food MSMEs that adopt a circular economy approach show an economic performance ratio of 5.17, higher than that of non-processed food MSMEs of 3.64.

Meanwhile, the achievement of social indicators for MSMEs that do not process their products and instead apply the circular reuse economy principle is 2,358, higher than processed MSMEs, which are only 2,074. This shows that processed MSMEs that apply the circular reuse economy principle have a higher RSI value than non-processed MSMEs. This means that MSMEs not following circular principles have a higher-than-average RSI ratio. On the other hand, processed MSMEs that follow circular principles have a lower RSI ratio. The application of circular economy principles related to the achievement of environmental indicators is non-processed MSMEs 15.28, which exceeds the value of 11.21 for processed agribusiness MSMEs.

Employee welfare has become an essential focus for these two categories of agribusiness MSMEs. Reference [34] shows that this emphasis can positively affect employee motivation and productivity. In addition, these companies have excelled in generating sustainable net profits, managing expenses, and achieving improved product efficiency.

The study results show that MSMEs involved in food product processing have a higher RSI value than MSMEs that do not process food products in all economic indicators, except for salary increases. In addition, the average RSI of MSMEs that process circular food is greater than that of MSMEs that process non-circular food, which indicates that MSMEs that process circular food have better performance and adhere to the principles of the circular economy in the economic indicators outlined in Table 4.

In addition, the ratio of RSI for MSMEs that process circular food to the average RSI of respondents across various economic indicators was lower than the ratio of RSI for MSMEs that processed non-circular food to the average RSI of respondents. This shows that MSMEs that process circular food must align with circular economy principles for specific economic indicators. MSMEs can improve their overall performance by integrating circular economy principles into various economic indicators [15].

In addition, MSMEs engaged in agribusiness related to processed foods showed better performance in reducing the incidence of work accidents, consistent with findings [40] that underscored efforts to increase labor productivity. Meanwhile, MSMEs engaged in processing non-food circular products must increase labor productivity levels and reduce the incidence of work accidents to achieve higher performance.

Agribusiness MSMEs have improved efficiency and productivity by applying circular economy principles in their material management. Therefore, other agribusinesses of similar scale can adopt these best practices to improve their environmental performance. Although the RSI ignores certain variables, such as challenges related to managing production residues, MSME actors have raised specific issues related to the results of the first goal.

In today's increasingly crucial circular economy landscape, MSMEs must apply principles that can improve their social and environmental performance [41]. Although circular agribusiness MSMEs have effectively integrated circular economy principles into their material management, there are still opportunities for improvement in other areas. Therefore, agribusiness MSMEs must continue innovating and improving their methods to achieve better social and environmental outcomes.

3.2.4 Determinants of agribusiness MSMEs in Circular economy implementation

In the initial testing stage (Block 0), the model showed significant results with a p-value of 0.000. Given that the p-value is below 0.05, we can reject the null hypothesis (H0) at a significance level of 5%. This indicates that when independent variables are used together, they will impact the implementation of the circular economy by agribusiness MSME actors. This implies that including independent variables can substantially affect the model, indicating that the model matches.

The independent variables selected for this study are based on previous studies. Corporate responsibility is represented by X1 [11], shareholder pressure by X2 [3], competitiveness by X3 [30], culture by X4 [33], and good behaviour by X5 [34]. These variables impact the perception of company owners when applying sustainability principles. Partial logistic regression was used to estimate these variables in this study. These variables were assessed using the Log Likelihood, Cox & Snell R Square, Nagelkerke R Square, and Chi-Square Hosmer and Lemeshow tests.

The results of data analysis using logistic regression are shown in Table 5. Corporate responsibility, shareholder pressure, competitiveness, culture, and good behaviour all point to a Sig Wald P value > 0.05. This indicates a rejection of H1, indicating that these variables do not significantly affect the implementation of the circular economy partially. However, the Culture variable has a Sig Wald value < 0.05, meaning H1 is accepted. This indicates that the Cultural variable contributes significantly to the partial application of circular economy principles.

Table 5. Results of variable equations in logistic regression

a. Variable(s) entered on step 1: CORP_RESP, SHARE_PRES, COMPTSS, CULTURE, GOOD_BHVR

In this study, cultural variables influence the use of circular economy principles by agribusiness MSMEs. This is in line with the research [8], which shows that commitment to behaviour will be formed into a culture that significantly affects innovation.

Habits of action result from routine activities with zero innovation based on sustainability. The routine of activities in innovating is essential because these habits will become a culture of activities that the company will achieve sustainably. Waste management, of course, requires a skill that will affect business sustainability, especially environmental impacts. According to reference [42], it is stated that if the innovation routine can be managed correctly and in a way that develops businesses based on the circular economy, the culture of implementing circular economy principles can take into account the impact on the economy, society and community. Meanwhile, in calculating the costs of implementing the circular economy and considering the benefits that can be obtained, every MSME will likely use the principles of the circular economy in their business.

The competency variable of applying circular economy principles cannot affect the use of circular economy principles by agribusiness MSMEs. Acquiring competence is a requirement for the primary goal of establishing a business. The competencies obtained will be used to develop business operations and for business expansion activities through various future activities. More importantly, if the skills required to run a business are profitable, the business's survival will be guaranteed.

MSME owners must be able to make integrated plans for all activities that are or will be carried out to ensure that the culture of implementing the circular economy is maintained. However, not all MSMEs maintain it in practice because they have enough capital to run a circular economy. According to Sohal et al. [18], the culture of implementing the circular economy is essential for MSME actors to want to implement it and whether it can provide a revenue stream (additional income) for the business itself. Factors such as corporate responsibility, pressure on business owners, competitiveness, and good behaviour from applying circular economy principles cannot affect the use of circular economy principles by agribusiness MSMEs. Only MSME cultural factors can affect the use of circular economy principles by agribusiness MSMEs. Therefore, it is necessary to conduct further studies by including factors other than those studied above to find further actions to encourage agribusiness MSMEs to be more active in implementing circular economy principles and optimising potential profits from applying these principles.