Digital Innovation Competition and ESG Trade-Offs: Evidence from Chinese Listed Firms

As digital technologies reshape competitive dynamics, firms face increasing pressure to keep pace with the innovation activities of their peers. While digital transformation is often viewed as a driver of sustainable development, less attention has been paid to how peer firms’ digital innovation relates to corporate environmental, social, and governance (ESG) performance within the broader innovation system. Using panel data from Chinese A-share listed firms from 2012 to 2023, this study constructs an industry-level measure of peer digital technology innovation based on the digital patenting activities of other firms in the same narrowly defined industry. The results show that peer digital technology innovation is significantly associated with a decline in ESG performance, revealing trade-offs between digital competitive adaptation and sustainability outcomes. Mechanism analysis further provides suggestive evidence consistent with two potential channels: heightened digital risk perception and stronger managerial short-term orientation. Heterogeneity analysis shows that this negative association is pronounced in small and medium-sized enterprises, tech-intensive industries, and highly competitive markets. In addition, external governance conditions shape the magnitude of this relationship: stronger intellectual property protection amplifies the negative association, whereas greater investor attention attenuates it. Supplemental analysis of ESG rankings further indicates that digital competition may allow specific firms to enhance their relative standing. These findings provide new evidence on the unintended consequences of digital competition and contribute to the literature on corporate digitalization and sustainability.