Integrating ESG into Corporate Tax Strategy and Innovation: Evidence from South Korea

Although corporate tax avoidance strategies may increase internal funding that supports innovation, they can also undermine it by weakening governance and encouraging short-term financial objectives. However, the overall impact remains theoretically contested, with insufficient empirical research available. This study examines the relationship between corporate tax avoidance and innovation, focusing on the moderating role of environmental, social, and governance (ESG) practices. Using a panel dataset of 12,408 firm-year observations of South Korean listed companies from 2014 to 2023, Tobit regression analyses reveal a statistically significant negative association between tax avoidance and innovation. Notably, this negative relationship is significantly mitigated in ESG-engaged firms, particularly those with stronger ESG performance. Further analysis indicates that these moderating effects are driven primarily by the social and governance domains. These findings suggest that ESG practices can offset the detrimental effects of tax avoidance by strengthening governance and stakeholder alignment. This study underscores the importance of integrating ESG principles into corporate tax strategies to support long-term innovation and sustainable corporate development.