📈 economics

An integrated TOE-IE-ESG framework linking ESG performance and managerial cognition to digital transformation quality in small and medium-sized enterprises

This study integrates the Extended TOE-IE model, managerial resource cognition theory, and ESG research to demonstrate that while ESG performance drives substantive digital transformation in SMEs primarily through alleviating financing constraints, its effectiveness is critically dependent on managerial leadership capabilities and is often undermined by managerial myopia, ultimately revealing that substantive digitalization fully mediates the link between ESG performance and operational success.

Original authors: Minh Nguyen Tien, Hai Do Huu

Published 2026-06-24

📖 4 min read☕ Coffee break read

CC BY 4.0

Original authors: Minh Nguyen Tien, Hai Do Huu

Original paper licensed under CC BY 4.0 (https://creativecommons.org/licenses/by/4.0/). ✨ This is an AI-generated explanation of the paper below. It is not written or endorsed by the authors. For technical accuracy, refer to the original paper. Read full disclaimer

Imagine a small business (a "SME") as a small boat trying to navigate a stormy sea. The boat needs two things to survive: a new engine (Digital Transformation) to move faster, and a clean hull (ESG Performance) to show it's eco-friendly and well-maintained.

This paper asks a simple question: If we give the boat a clean hull (high ESG ratings), will it automatically get a better, more powerful engine (high-quality digital transformation)?

The researchers say: "Not necessarily. It depends on who is steering the boat."

Here is the breakdown of their findings using everyday analogies:

1. The Two Types of "Upgrades"

The paper distinguishes between two ways a business can "go digital":

The "Strategic" Upgrade (The Paint Job): This is like putting a shiny new coat of paint on the boat or adding a fancy flag. It looks great on the outside, costs little, and makes the boat look modern. But the engine inside is still the same old, slow one. This is "compliance" – doing the bare minimum to look good.
The "Substantive" Upgrade (The Engine Swap): This is replacing the entire engine with a high-tech, fuel-efficient one. It's expensive, takes a long time, and is risky. But it actually makes the boat faster and more capable. This is "real transformation."

2. The Role of ESG (The Clean Hull)

The study finds that having a high ESG rating (a clean hull) does help the boat get a better engine.

How? It works like a credit score. When a boat looks well-maintained and eco-friendly, banks and investors trust it more. They lend money at lower rates. This extra cash allows the business to afford that expensive "Engine Swap" (Substantive Digitalization).
The Catch: While ESG helps, it mostly drives the real engine swap through money (financing). It doesn't automatically change the captain's mind.

3. The Captain's Mindset (Managerial Myopia)

This is the most critical part of the paper. The "Captain" is the business owner or manager.

The Short-Sighted Captain (Myopia): Some captains only care about what happens today. They are afraid of spending money on a new engine because they won't see the profit for years.
- The Result: When these captains feel pressure to be "green" (ESG), they don't buy the new engine. Instead, they just buy the shiny paint job (Strategic Digitalization). They look green and digital on the outside, but the boat hasn't actually improved.
- The Trade-off: The paper calls this a "Quality vs. Quantity" trade-off. Short-sighted captains increase the number of digital things they do (paint, flags, social media), but decrease the quality (real engine upgrades).
The Visionary Captain: These captains look 5 or 10 years ahead. They understand that the new engine is worth the cost.

4. The "Digital Skills" Factor (The Co-Pilot)

The paper introduces a "Co-Pilot" factor: Digital Skills and Leadership.

Even if the boat has a clean hull (ESG) and a long-term plan, if the Co-Pilot doesn't know how to install a new engine, the upgrade fails.
The study found that Digital Skills are the strongest driver of all. A captain with high digital knowledge can take the money provided by ESG ratings and turn it into a real engine swap. Without this knowledge, the money just sits there or gets spent on paint jobs.

5. The Final Outcome: Speed vs. Appearance

Real Engine (Substantive Digitalization): This is the only thing that actually makes the boat faster and more profitable.
Shiny Paint (Strategic Digitalization): This looks nice but doesn't help the boat move faster.
The Conclusion: ESG ratings provide the fuel (money) to upgrade, but the Captain's mindset determines whether you get a new engine or just a new coat of paint.

Summary for the General Public

If you are a small business owner, this paper tells you:

Being "Green" (ESG) helps you get money to upgrade your technology.
But, money alone isn't enough. If you (the boss) are too focused on short-term profits, you will spend that money on "fake" digital upgrades that look good but don't work.
To win, you need a boss who thinks long-term and actually understands technology. If you have that, the money from being "green" will turn into a powerful new engine that makes your business thrive. If you don't, you'll just have a very expensive-looking boat that doesn't go anywhere faster.

The Bottom Line: Sustainable digital transformation isn't just about buying software; it's about changing the mindset of the person in charge.

Technical Summary: An Integrated TOE-IE-ESG Framework Linking ESG Performance and Managerial Cognition to Digital Transformation Quality in SMEs

1. Problem Statement and Research Gap

Small and medium-sized enterprises (SMEs) face concurrent pressures to undergo digital transformation and improve Environmental, Social, and Governance (ESG) performance. While existing literature treats these as separate strategic imperatives, the mechanisms linking ESG ratings to the quality of digital transformation remain unexplored. Specifically, there is a lack of understanding regarding how ESG pressure, managerial cognitive orientation (particularly myopia), and digital capability development jointly determine whether SMEs achieve "substantive digitalization" (deep, strategic integration) or merely "strategic digitalization" (visible, compliance-driven signaling).

This gap is critical because, similar to green innovation, digital transformation involves high capital requirements and long payback periods, making it vulnerable to managerial myopia. The paper argues that under ESG pressure, myopic managers may engage in a quality–quantity trade-off, increasing visible digital adoption while suppressing genuine operational integration.

2. Methodology

The study proposes and empirically illustrates an Extended TOE-IE-ESG Framework, synthesizing three research streams:

The TOE-IE model (Technology-Organization-Environment-Individual-Economic) for SME digital adoption.
Managerial resource cognition theory regarding digital capability development.
ESG performance and managerial myopia in innovation contexts.

Data and Design:

Dataset: A reference dataset of $N=500$ SMEs was constructed using secondary data parameters derived from prior empirical studies (specifically Ramos-Vecino et al. [1], Guo et al. [4], and Nykänen et al. [6]).
Target Population: Manufacturing, trade, construction, and professional services SMEs in a peripheral European regional context.
Unit of Analysis: The top decision-maker (owner-manager or CEO).
Analytical Approach: Ordinary Least Squares (OLS) regression and mediation analysis were employed. Variables were standardized, and interaction terms were created using mean-centered data to test moderation effects. Structural models were tested sequentially to examine direct effects, moderation, and mediation.

Key Variables:

Independent: ESG performance (rated 1–9), Managerial Myopia (measured via text analysis dictionary), Individual Factor (digital skills/leadership).
Dependent: Substantive Digitalization (back-office integration depth) vs. Strategic Digitalization (front-end presence).
Mediators: Financing Constraints (FC) and Management Digital Awareness (MEPA).
Outcome: Operational Performance.

3. Key Results

The empirical illustrations yielded the following statistically significant findings:

ESG as a Driver: ESG performance significantly promotes substantive digitalization ( $\beta = 0.127, p < 0.001$ ). This relationship is partially mediated by the alleviation of financing constraints (the "supervisory effect"), where higher ESG ratings reduce information asymmetry and lower capital costs. The "incentive effect" (managerial awareness) was found to drive visible, compliance-oriented adoption rather than substantive integration.
Managerial Myopia: Managerial myopia directly suppresses substantive digitalization ( $\beta = -0.101, p < 0.001$ ). Crucially, it negatively moderates the relationship between ESG and substantive digitalization ( $\beta = -0.055, p < 0.05$ ).
Quality–Quantity Trade-off: Under ESG pressure, managerial myopia shifts investment from substantive to strategic digitalization. While the interaction for strategic adoption was marginally significant ( $\beta = +0.037, p = 0.084$ ), the pattern mirrors the quality–quantity trade-off observed in green innovation literature.
The Individual Factor: The Individual Factor (digital skills and leadership orientation) emerged as the dominant direct driver ( $\beta = 0.142, p < 0.001$ ) and significantly amplifies the positive effect of ESG on substantive digitalization ( $\beta = +0.129, p < 0.001$ ).
Performance Mediation: Substantive digitalization is the dominant predictor of operational performance ( $\beta = 0.566, p < 0.001$ ) and fully mediates the path from ESG performance to operational outcomes. Strategic digitalization showed only a minor positive effect.

4. Key Contributions

The paper makes four specific contributions to the literature:

Framework Integration: It is the first study to integrate ESG performance into the TOE-IE architecture, positioning it as a formal environmental regulatory driver alongside traditional economic and organizational factors.
Conceptual Distinction: It introduces and empirically validates the distinction between "substantive" and "strategic" digitalization, framing them as a quality–quantity trade-off mechanism.
Micro-Mechanism: It establishes managerial cognition (specifically time horizons and interpretive schemas) as the micro-level mechanism linking ESG pressure to the quality of digital transformation, rather than just the level of investment.
Theoretical Extension: It extends Upper Echelon Theory by demonstrating that managerial time horizons distort the composition of strategic digital investment (substantive vs. strategic), not merely the volume.

5. Significance and Claims

The authors claim that sustainable digital transformation in SMEs is fundamentally a cognitive and attitudinal process. While ESG performance provides the necessary environmental impetus and structural financing support, the quality of the transformation depends critically on managerial attributes.

Policy Implication: The findings suggest that sustainable digital transformation requires complementary investments in managerial leadership capability and cognitive schema enrichment. Relying solely on capital subsidies or ESG compliance incentives is insufficient; without addressing managerial myopia and enhancing digital cognitive schemas, ESG-driven policies may inadvertently accelerate "strategic" (low-quality) digitalization while failing to improve "substantive" transformation.
Limitations: The authors explicitly note that the study relies on a secondary-data-derived reference dataset. Consequently, all reported relationships require validation with primary survey data from actual SME populations across contrasting regulatory contexts. The study serves as an empirical benchmark and theoretical illustration rather than a definitive confirmation of causal relationships in real-world settings.