*2.2. Hypothesis Development*

#### 2.2.1. ESG and Corporate Green Innovation

This paper believes that the increasingly stringent social responsibility challenges brought about by the requirements of sustainable development will provide some enterprises that respect environmental, social, and governance factors and gradually accumulate and establish specific ESG performance in practicing the ESG concept with a brand-new competitive advantage in transnational investment. This ESG rating performance deviates from the profit maximization motivation (only applicable to shareholders), which is completed when we promote the enterprise to meet the social responsibility requirements and actively respond to all stakeholders [45]. The term "ESG rating performance" specifically refers to the sum of the valuable and scarce resources, systems, and capabilities established by enterprises in ESG practice, such as green technology, brand, social responsibility system, and other ESG asset advantages and institutional advantages. ESG differs from conventional monopolistic advantages as it emphasizes meeting the demands of shareholders, consumers, suppliers, communities, and other stakeholders and pursues inclusive development, which contributes to economic and social development through interaction with non-market factors. Therefore, we found that the benefits of ESG promoted the green innovation of enterprises by encouraging them to develop new competitive advantages in the following two aspects: First, they surpassed the limitations of traditional asset ownership advantages and created unique asset ownership advantages. ESG practices can assist businesses in modernizing their technology and products, enhancing their capacity for green innovation, and fostering better ties with their employees, suppliers, and other stakeholders [13]. In exceptional circumstances (such as the period of COVID-19), an enterprise will obtain tremendous development if it treats upstream and downstream producers and other stakeholders with sincerity. Meanwhile, ESG practices account for a high proportion of the development of intangible assets [46], and the enhancement of the reputation value for those enterprises that emphasize ESG will actively disclose the information about their social responsibility to the public, both objectively and subjectively, so that the public can judge the social responsibility behavior of the enterprise, and the enterprise can establish a trustworthy reputation [47]. Compared with other wary enterprises, those that have benefited in their asset advantage and reputation due to ESG practices will seize market share in addition to the pursuit of ESG by investors and customers [48]. For example, the financing convenience brought about by the favor of investors and creditors can encourage the green innovation of enterprises as it copes with the stress of capital constraints in green innovation [49]. Therefore, the ESG rating performance can significantly reduce the cost of financing, enhance a company's overall competitiveness, and help it gain more market share. Schuler and Cording (2006) have proposed that enterprises equipped with a better corporate social performance will be more competitive, and those with a good ESG performance that satisfy the requirements of stakeholders may incur lower financing costs and hold greater market share [50].

Second, they enhance the legitimacy of green innovation investment. The enterprise ESG advantage's most distinctive feature is its legitimacy. Environmental protection, stakeholders' rights and the protection of interests, and upholding social obligations are not just what customers and investors expect from corporations but are also slowly becoming what regulatory agencies require of them [51]. Impacted by ESG practices, enterprises regard green innovation investment as an important driving force to promote economic growth and believe that they have made contributions to overall social welfare due to protecting the interests of stakeholders [51]. On the contrary, if an enterprise violates the ESG concept, it may result in the rapid spread of public concern, impairing its enterprise image and brand reputation significantly; hence, the legitimacy of enterprise operations will become more prominent [52].

In addition, the endogenous institutional advantages derived from social responsibility formed around the ESG concept are also conducive to embedding the value system of the business strategy, thus reducing the pressure of institutional isomorphism [52]. ESG advantages address the legal issue of green innovation and endow enterprises with flexible green innovation strategies, which in turn, improve the level of green innovation. In addition, the general recognition of the legitimacy of the ESG concept lowers the transfer costs of the green technology, brand reputation, and institutional mechanism obtained through ESG practices, facilitating the production of green innovation resources and realizing the driving effect of ESG advantages on enterprise strategy [53]. The green innovation method utilizes internal transfer in addition to ESG advantages and can internalize open market transaction expenses to obtain internalized advantages [53]. Enterprises that adopt market mechanisms will run into issues with market failures such as information asymmetry between parties in technology license agreements and horizontal externalities brought on by brand sharing. Green innovation can minimize market transaction costs and take advantage of organizations economies of scale and scope by placing essential assets under shared control. Therefore, hypothesis 1 is proposed:

#### **Hypothesis 1.** *ESG rating performance has a positive impact on corporate green innovation*.

#### 2.2.2. Moderation Effect of Institutional Environment

According to institutional theory, the institutional environment has a crucial influence on the structure and behavior of an organization [54]. An efficient legal system, good government market relations, and well-developed product and factor markets can support healthy market development by facilitating information flow, supporting competition, and minimizing externalities [55]. Firms that respond effectively to institutional pressures and comply with norms and rules have easier access to the external resources needed for survival and growth by ensuring social legitimacy [56]. Accordingly, in order to operate smoothly and stably, firms need to respond to institutional pressures [57] and the level of institutional pressures affects the strategic choices and effectiveness of firms [58]. Meanwhile, the resources and regulations on which green innovation depends are key variables for innovation, whereas the access to core resources depends on a combination of market-based and non-market-based strategies and is determined by the institutional environment [39]. For example, companies need to improve their ESG rating performance to respond to stakeholder pressure [59]. Therefore, the impact of firm ESG ratings on green innovation may vary depending on the role of the pressures from the institutional environment, and it is necessary to investigate the impact of each type of institutional pressure [60], which can be classified as coercive, normative, or imitative, on green innovation by interacting with firm ESG ratings.

First, coercive pressures are defined as "formal or informal pressures arising from the institutions and regulations of the society to which the firm belongs" [61]. Coercive pressures resulting from the influence of those in power, such as regulations by government agencies, can shape the standards of corporate behavior and encourage firms to adopt or reinforce certain behaviors [60]. In this regard, ESG-related government policies and regulations constitute coercive pressures on firms and influence their expectations for green innovation strategies. Second, imitation pressures refer to the pressure to imitate competitors' behavior, which is identified as success. A firm that adapts to imitation pressures is more likely to protect itself from potential losses and gain legitimacy in its decisions. Thus, it imitates leading competitors to ensure social legitimacy and decision legitimacy [61,62]. From this perspective, the ESG rating performance reflects the imitation of peer organizations' behavior, which is perceived as successful by stakeholders in a similar organizational structure [62]. For example, manufacturers tend to imitate their competitors in managing extended supply chain activities in order to achieve sustainably managed carbon reduction targets. This measure can increase corporate green innovation by enhancing the legitimacy and legality of corporate activities [63]. Normative pressures come from the values and standards of behavior recommended and expected by external stakeholders [64]. Firms must understand and comply with the standards, norms, and expectations of external stakeholders in order to achieve social legitimacy. In particular, customer demands form a key normative pressure [65], which can be an important driver for companies to enhance certain activities [60]. For example, positive consumer perception of a firm's environmentally friendly products and socially responsible activities can change a firm's green innovation decisions by acting as a normative pressure [66].

Thus, on the one hand, in regions with relatively well-developed institutional environments, the three institutional pressures mentioned above enhance the impact of ESG ratings on a firm's reputation and image, and the key factors of the ESG rating performance depend mainly on its market-oriented operations and management capabilities, which are consistent with entrepreneurs' knowledge and social legitimacy perception structures. This will undoubtedly strengthen the role of the ESG rating performance in promoting corporate green innovation strategies. On the other hand, a sound institutional environment can provide the necessary property rights protection, guarantee the benefits of strategic decisions, enhance the long-term orientation of decision makers, further strengthen the motivation of enterprises to engage in green innovation driven by ESG performance [67], effectively protect the green innovation achievements of enterprises, and enhance their willingness to adopt green innovation. Therefore, hypothesis 2 is proposed.

**Hypothesis 2.** *The more perfect the institutional environment, the stronger the positive relationship between the ESG rating performance and corporate green innovation*.

#### 2.2.3. Moderation Effect of Redundant Organizational Resources

Resource redundancy in organizations is defined as resources kept within an organization beyond their usefulness and serves as a practicable or potential resource buffer to enhance an organization's ability to respond to unexpected changes in the external environment and devise strategies [68]. At the organizational level, green innovation strategies emphasize that organizations should make greater resource investments [64], and having more disposable resources facilitates an organization's ability to operate and that an organization's redundant resources can provide resource support for green innovation strategies. In particular, the increasing level of redundant resources for disposal coincides with an organization's ability to implement green innovation behaviors and behavioral freedom [69]. Gruber (2010) showed that a higher degree of redundancy in organizational resources facilitates an organization to try more unpredictable occurrences and supports an organization to search for opportunities and problem solutions on a larger scale [70]. At the managerial level, redundant organizational resources increase the risk perception of managers' decisions. For decision makers, the degree of risk perception is an important reference point for their strategic choices, and managers' preferences for strategic decisions depend on the impact of the same decision risk on different organizations [71]. Managers may make riskier strategic choices when organizations are more resilient to external risks as a result of the high level of redundant organizational resources, whereas they tend to be more conservative when making decisions [72]. Consequently, the ESG rating performance may have a greater impact on corporate green innovation in the context of abundant redundant organizational resources. Figure 1 shows the theoretical research model, as follow.

**Figure 1.** Theoretical research model.

**Hypothesis 3.** *The higher degree of redundant organizational resources will strengthen the positive relationship between ESG rating performance and corporate green innovation*.
