A Strategic Pathway from ESG Management to Innovation: The Serial Mediating Roles of Absorptive Capacity and Dynamic Capability

In an era of uncertainty, dynamic capabilities are recognized as an essential source of competitive advantage for firms. In this study, we examine the relationships between environmental, social, and governance (ESG) management; innovation; and the development of dynamic capabilities. Researchers have recently sought to explain ESG performance in relation to innovation and have increasingly considered the role of dynamic capabilities in this context. However, prior research has not adequately demonstrated how absorptive capacity and dynamic capability may develop through ESG management, and further examination is needed to determine whether ESG management is associated with innovation beyond incremental performance outcomes. By considering absorptive capacity and dynamic capability, we examine whether these capabilities mediate the relationship between ESG management and innovation and whether they operate sequentially. Using data from 200 Korean small- and medium-sized enterprises (SMEs), we analyzed the relationship between ESG management and innovation using Hayes’s PROCESS MACRO to identify the mediating roles of absorptive capacity and dynamic capability. The results indicate that SMEs’ commitment to ESG policy and practices is associated with innovation through both absorptive capacity and dynamic capability. Based on these findings, we discuss innovation strategies for SMEs operating in changing environments. This study contributes to the literature theoretically by clarifying the process through which ESG management is associated with innovation via absorptive capacity and dynamic capability. From a practical perspective, it suggests that, for resource-constrained SMEs, ESG management may serve as a strategic tool rather than merely a regulatory requirement, helping firms respond to uncertainty and strengthen their competitive advantage.