Substantial Innovation or Strategic Innovation: The Influence of ESG Performance on Corporate Innovation Strategy

: The effectiveness of ESG performance in promoting corporate innovation has been widely demonstrated. However, a significant research gap remains unexplored that prior scholars have neglected the research into the influence of ESG performance on corporate innovation strategy. Using the sample of China's A-share listed companies from 2007 to 2020, this paper analyzes the influence of ESG performance on corporate innovation strategy. It is found that ESG performance can promote substantial innovation and strategic innovation in different degrees. Further analyses show that ESG performance can promote substantial innovation more than strategic one. Therefore, while pursuing upgrading and transformation, corporations should pay more attention to the influence of ESG performance on innovation strategies, and promote a virtuous circle of long-term development of corporations.


Introduction
With the occurrence and spread of the COVID-19 epidemic, the global economic growth rate continues to slow down, and with the problems of extremely changeable climate, intensified greenhouse effect and tight energy supply, promoting energy conservation and emission reduction and achieving the goal of sustainable development has become the key point of global attention. Countries and related organizations around the world have promulgated a number of standards, such as the Paris Agreement in 2015, which made it mandatory for participating countries to decarbonize. In September 2020, China clearly put forward the goal of "achieving peak carbon dioxide emissions by 2030 and achieving carbon neutrality by 2060" (referred to as the "double-carbon goal" for short). More and more corporations are pursuing their own low-carbon development, and ESG has become the consensus under the demands of global economic green transformation, emission reduction and carbon reduction, and new energy development. Therefore, to meet the increasingly strict regulatory requirements and reflect the needs of the times of sustainable development, corporations should disclose their non-financial statements (namely ESG information disclosure) according to the requirements of relevant departments in addition to the traditional financial statements. With regard to the influence of ESG performance on corporate innovation, the existing literatures have reached a consensus conclusion: the improvement of corporate ESG performance will promote corporate innovation (Pavelin et al. 2008; Huang et al. 2019). However, few literatures study the strategy of corporate innovation from ESG performance. Corporate innovation strategies are divided into two types (Li et al.2016): The first one, the "high-quality" innovation behavior, is to promote the technological progress and gaining competitive advantage,which is called substantial innovation (for example, invention patents); The second is to cater to the policy or supervision by pursuing the "quantity" and "speed" of innovation, which is called strategic innovation (such as utility model and design patent).Innovation has promoted industrial and technological upgrading (Lin, 2002). Therefore, it is of great practical and policy significance to examine the promotion effect of ESG performance from the perspective of innovation strategies, to improve the social responsibility disclosure system of listed companies, to promote the innovation and upgrading of corporations, and to make scientific use of innovation drivers to achieve the goal of sustainable and healthy development. Based on the data of China's A-share listed companies from 2007 to 2020, this paper examines the influence of ESG performance on corporate innovation strategies. The main contributions of this paper are as follows: (1) On the theoretical level, it enriches the literature on how ESG performance affects corporate innovation strategies. Based on the data of listed companies in China, this paper empirically tests the mechanism that ESG performance can promote substantial innovation and strategic innovation to varying degrees. In further analysis, the research of this paper shows that the better performance of ESG, the more it tends to substantial innovation, rather than strategic innovation. Therefore, improving the ESG performance can lay a solid foundation for corporations to gain competitive advantage. (2) On the practical level, it enriches the exploration of how ESG performance can improve enterprise value. The increase of invention patent applications can improve the market value of corporations, and substantial innovation can promote the development of corporations. This paper deepens the recognition of the company's value creation function by corporate ESG performance, and also provides empirical evidence support for listed companies to attach importance to and improve ESG performance and enhance their substantial innovation ability. The remainder of this paper is organized as follows. Section 2 provides the literature review and research hypotheses; Section 3 presents the research design; Section 4 puts forward analysis of empirical results;and Section 5 presents the conclusions.

The Influence of ESG Performance on Substantial Innovation
In the fierce market competition, in order to win market share, corporations tend to invest resources in substantial innovation activities (not strategic innovation activities), and then bring technological progress and competitive advantage, and finally get rich returns. Compared with traditional investment activities, substantial innovation activities have higher investment risks (such as large investment, high risk, long cycle and other challenges), which makes corporations often face financing constraints, which leads to insufficient capital investment and limited innovation activities. On the one hand, different from general investment, projects with substantial innovation investment require higher risk premium than general investment. On the other hand, information asymmetry and moral hazard between internal managers and external investors will further increase the cost of external financing. However, better ESG performance reduces the degree of information asymmetry with investors, helps corporations win the recognition and support of stakeholders in substantial innovation activities, alleviates investors' market doubts caused by poor access to information, reduces the cost and resistance of corporations in the financing process, and ensures the stability of capital chain of substantial innovation activities. To sum up, that better ESG performance improves financing constraints provides financial support for substantial innovation activities, and corporations tend to make substantial innovation. Based on the above analysis, this paper proposes Hypothesis 1. Hypothesis 1: Better ESG performance boosts substantial innovation.

The Influence of ESG Performance on
Strategic Innovation According to the principle of cost-benefit, business operators are rational economic men, and they will weigh the income and cost of any investment activity. When the income is greater than the cost, they will have the motivation to choose the scheme, otherwise, they will give up the choice. The uncertainty of innovation itself is not only the characteristic that managers focus on when making internal investment, but also the investors pay special attention to corporate risks when investing in corporations. Simply put, substantial innovation has the characteristics of large investment, long time, and extremely uncertain output, while strategic innovation-expected to bring government subsidies or tax incentives-has the characteristics of low investment, short time, and fast output. Rational operators are often more willing to carry out strategic innovation because they are afraid that corporations will take risks and lose their own benefits. This means that the "innovation" of an corporation is only a strategy of the management, and it tends to pursue innovation only "speed" and "quantity" while ignoring "quality" to whitewash the superficial innovation ability. To sum up, that better ESG performance meets the needs of policy and supervision will be the primary consideration of innovation strategy, and corporations tend to innovate strategically. Based on the above analysis, this paper proposes Hypothesis 2. Hypothesis 2: Better ESG performance boosts strategic innovation.

Sample Selection and Data Source
In this paper, China's A-share listed companies from 2007 to 2020 are selected as the research samples, deleting ESG rating data which are missing and corporations whose total operating income is less than zero. So, the final sample has 31,641 observations. The data sources of this paper are as follow: (1) Financial, financing constraints, patents and other data related to corporate operations are all from the CSMAR database; (2) ESG rating data is from Huazheng ESG database. To eliminate the influence of outliers on the model results, the main continuous variables are winsorized at the 1% and 99% levels.

Independent Variable
ESG Performance.The ESG rating data of this paper comes from Wind Huazheng ESG database, which is developed by Huazheng Index Information Service Company and is suitable for ESG database of A-share listed companies in China at present. The database now covers all A-share listed companies. In this paper, the ESG data of C-level companies is given 1 point, CC-level companies is given 2 points, CCC-level companies is given 3 points, and so on. The ESG performance scores is 1-9 points, with 1 point indicating that the ESG performance of listed companies is poor, and 9 points indicating that ESG performance is better.

Dependent Variables
Corporate innovation ability.Scholars at home and abroad generally use innovation input and innovation output to measure corporate innovation ability. The measurement of innovation investment generally adopts R&D expenditure ( , we regard the application of "high-quality" invention patents as substantial innovation, and the application of utility model patents and design patents as strategic innovation. In this paper, the total number of invention patents of an corporation is increased by 1, and then the natural logarithm is taken to measure the substantial innovation ability of the corporation; The total number of utility model patents and design patents is increased by 1, and then the natural logarithm is taken to measure the strategic innovation ability of the corporation.

Control Variables
To more accurately explore the influence of ESG performance on corporate innovation strategy, this paper uses the practice of Li Jinglin (2021) for reference to control other variables that may affect corporate innovation, including: corporate R&D investment (RD1,RD2), corporate model (Size), fixed capitalproduction ratio (PPE), cash flow ratio of operating activities (Cfo), negative debt ratio of capital -production (Lev), ratio of independent directors (LEV). In addition, the industry variable (Industry) and annual variable (Year) are also controlled. See Table 1 for specific variable definitions.
where Innovation represents Innovation output,and ESG represents the ESG rating obtained by enterprise.β 0 and β 1 are the coefficient value,and Controls is the control variable ,and e is the residual value. The regression models of this paper control the time fixed effect and industry fixed effect, where the industry is set according to the 2012 industry classification standard of the China Securities Regulatory Commission. To control the influence of the heteroscedasticity of the error term and time-series-related problems on the standard error of the estimation coefficient, this paper's robustness test adopts R&D expenditure replacement.

Descriptive Statistics
The descriptive statistical results in Table 2 show that the average and maximum of R&D investment level (RD1) of the sampled corporations is 0.017 and 0.095 respectively, and the standard deviation is 0.019, which indicates that the differences of R&D investment levels among corporations is small. The average and maximum of corporate innovation (PAT) are 0.559 and 4.787 respectively, and the standard deviation is 1.188, which shows that there is a big difference in corporate innovation among sample corporations. The average and maximum of ESG scores of corporations are 6.440 and 9.000 respectively, and the standard deviation is 1.108, which indicates that there is a big difference in ESG performance among corporations. The average and maximum of financing constraints (KZ) is 1.011 and 6.463 respectively, and the standard deviation is 2.192, which indicates that financing constraints among corporations are quite different. Except for corporate scale, financing constraints and ratio of independent directors, the standard deviation of other control variables are less than 1, and the fluctuation range is small, indicating that the data is stable.  Table 3 and Table 4 report the regression results for the ESG performance and corporate innovation. To avoid the impact of the heteroscedasticity of disturbance items on the empirical results, this paper uses a firm-level clustering robust standard error. Table 3 controls the industry fixed effect and time fixed effect, while Table 4 adds other control variables that may affect the innovation level of corporations.

ESG Performance and R&D Investment
The results show that ESG performance has a significant positive impact on R&D investment. Column (1) of Table  4 shows that when other variables are controlled and innovation input (RD1) is used as the dependent variable, the coefficient on ESG is 0.001 and is significantly positive at the 1% level. After adding control variables, controlling the annual and industry effects, the adjusted R2 gradually increased to 0.378, which indicates that this model has more suitable goodness of fit. Note: *, **, and *** are, respectively, the significant levels at 10%, 5%, and 1%; t statistics in parentheses. Note: *, **, and *** are, respectively, the significant levels at 10%, 5%, and 1%; t statistics in parentheses.

Performance and Corporate Innovation Strategy
In addition, Table 4 also reports the regression results for ESG performance and corporate innovation strategy. Taking Column (2) as an example, the coefficient of ESG is 0.035, which is significantly positive at the level of 1%, indicating that ESG performance significantly exerts a huge positive influence on substantial innovation (Invention output).After adding control variables, controlling the annual and industrial effects, the adjusted R2 gradually increased to 0.065 , which indicates that this model has more suitable goodness of fit. Hypothesis 1 is verified. Column (3) shows that the coefficient of ESG is 0.017, which is significantly positive at the level of 1%, indicating that ESG performance can significantly promote strategic innovation (Output of utility model and design).After adding control variables, controlling the annual and industrial effects, the adjusted R2 gradually increased to 0.053, which indicates that this model has more suitable goodness of fit. Hypothesis 2 is verified.

Test of the Mediating Role of Financing Constraints
As is depicted in Table 5 that the mediation effect of financing constraints (FC) is established, that is, better ESG performance can promote corporations to increase R&D investment and innovative behavior by easing FC.Columns (1) of Table 5 reports the empirical results of the enterprise FC measured by the FC index as intermediary variables. The results listed in Column (1) show that in the regression of ESG to FC, the ESG coefficient is -0.222, which is significantly negative at the 1% level, indicating a significant negative correlation between the ESG performance and the financing constraints and indicating that the better ESG performance of corporations can reduce financing costs, reduce the degree of information asymmetry and alleviate the financing constraints faced by corporations. In Column (2),(3),(4)and (5),the regression coefficient of FC on R&D investment, substantial innovation and strategic innovation is significantly negative at the level of 1%, which indicates that financing constraints have a restraining effect on these three factors. Table 5. Results of the mediating role of financial constraints  Note: *, **, and *** are, respectively, the significant levels at 10%, 5%, and 1%; t statistics in parentheses. All in all,FC have less inhibitory effect on substantial innovation than strategic innovation, while ESG performance promotes substantial innovation more than strategic innovation.

Measurement Method for Replacing Dependent Variables
In this paper, that the natural logarithm of the sum amount of R&D investment and 1 (RD2) is used to replace dependent variables, and the influence of ESG performance on R&D investment is further examined. As shown in Columns (1) of Table 6, the regression coefficient of corporate ESG performance is significantly positive at 1%. 0.481 Note: *, **, and *** are, respectively, the significant levels at 10%, 5%, and 1%; t statistics in parentheses.

Lag Effect of Dependent Variables
In this paper, the independent variable (ESG) and dependent variables(IPAT, UDPAT,PAT)lag by one period to alleviate the two-way causality problem. The results listed in Columns (2) and (4) of Table 7 show that the coefficients of the independent variable (ESG_Next) lagging behind one period are 0.018 and0.021, which are significantly positive at the level of 5%, and the result of the basic regression is robust. These results show that the ESG performance will promotes substantial innovation more than strategic innovation next year, and the coefficients lagging by one year are significant, indicating that innovation strategy needs time to adjust and lags, which is also consistent with hypothesis 1. It can be concluded that the result of the basic regression is robust. 0.376 0.064 0.05 0.069 Note: *, **, and *** are, respectively, the significant levels at 10%, 5%, and 1%; t statistics in parentheses.

Conclusions
ESG has become the consensus under the demands of global economic green transformation, emission reduction and carbon reduction, and new energy development. In this context, this paper, taking China's A-share listed companies from 2007 to 2020 as an example, applied linear regressions with panel data. The results show that ESG performance can promote substantial innovation and strategic innovation to varying degrees. Furthermore, FC have less inhibitory effect on substantial innovation than strategic innovation, while ESG performance promotes substantial innovation more than strategic innovation. In view of the above conclusions, this paper puts forward the following suggestions: Firstly, to gain competitive advantage and lay a solid foundation for further development, improving ESG performance is one of the ways. In the fierce market competition, corporations gain market share through the competitive advantages brought by technological progress and substantial innovation, and finally get rich returns. Better ESG performance effectively alleviates financing constraints to obtain sufficient R&D funding support, enhances its competitive advantage and promotes its high-quality development. Secondly, thanks to the active innovation policies such as mass entrepreneurship and innovation, the scientific research and technical service industry has developed rapidly, thus supporting the corporate innovation which mainly driven by the market. When taking ESG performance as an important indicator to measure the investment potential of corporations, external investors should fully consider the industry attributes of the corporations. Only in this way can we effectively assess the sustainability of investment income and investment risk, and promote corporations to improve ESG performance. Finally, government departments are establishing a sound information disclosure system and evaluation system of ESG, and guiding corporations to standardize information disclosure and reform. While doing a good job in ESG performance, we should give strong policy assistance to individual industries, thus promoting the high-quality development of Chinese corporations. This study has some limitations, which will require further research in the future. First, the subject of this research was only China's A-share listed companies. Future research may choose a wide range of topics from other fields to study. Secondly, China is an emerging country, so future researchers can compare the results with those of developed countries. Finally, future researchers can modify the model to take into account the current epidemic situation, and empirically test the impact of COVID-19 on the influence of ESG performance on corporate innovation strategy. Through further analysis of the industry, it is confirmed that the influence of ESG performance on corporate innovation strategy may be influenced by industry attributes. ESG performance ,R&D investment,financing constraints and corporate innovation have no significant relationship with the industry of agriculture, forestry, animal husbandry and fishery,which is a basic industry that needs to follow the objective laws of natural growth and development. Because the technical content is relatively low, the input cost is high, high financial support is needed, and there is no guarantee of market in a short time. The innovation of this industry is mainly promoted by the state rather than by market.