The Moderating Effect of ESG Level in the Relationship between Digital Transformation Capability and Financial Performance: Evidence from Foreign Subsidiaries of Korean Firms

Abstract

This study empirically analyzed the effect of digital transformation capability on the financial performance of foreign subsidiaries of Korean listed firms, focusing on the moderating effect of the ESG level. The results of an empirical analysis on data from 483 foreign subsidiaries of Korean listed firms collected through surveys from February to May 2021 are as follows. First, it was found that digital transformation capability had a positive effect on financial performance. Second, as a result of analyzing the moderating effect of the ESG level, it was found that the environmental (E) level and the social (S) level in ESG strengthened the positive relationship between digital transformation capability and financial performance. However, it was found that the level of governance (G) in ESG rather weakens the positive relationship between digital transformation capability and financial performance. The results of this study suggest that foreign subsidiaries need to actively build digital transformation capability in order to improve their financial performance. Since the results of this study suggest different moderating effects of ESG, practical implications can be suggested that foreign subsidiaries should consider the fact that different effects may occur for each ESG activity if they want to improve their financial performance through digital transformation capability.