Complementary or substitutive effects? The duality of digitalization and ESG on firm's innovation

Abstract

As an increasing number of companies are recognizing digitalization and sustainability to be important components of their overall business strategies, there is a growing need to evaluate the innovative outcomes of these two strategies. This study examines the dual effects of a digital orientation and a corporate environmental, social, and governance (ESG) orientation on firm innovation under firm resource constraints. The empirical results confirm the hypothesis that digitization and ESG practices promote corporate innovation. In addition, a combined effect of ESG and digitization strategies on innovation performance is confirmed, but this effect is substitutive for resource-constrained enterprises, such as those with high levels of financing constraints and small and medium-sized enterprises. The role in supporting or hindering the synergy between digitalization and ESG strategies in different regions and industry sectors may various. Enterprises should prudently implement a dual strategy encompassing both digitalization and ESG while fully considering the inherent interaction of the two to improve the level of strategic synergy.