Abstract
Leadership has an important role in achieving the SMEs’ innovation and performance. One of the great concepts of leadership styles is the Burns’ (1978) concept, which divides leadership into two: transformational and transactional. This study analyzed the direct and indirect effect of transformational and transactional leadership on SMEs’ performance. This was conducted in seven regencies/cities in East Java Province, with 165 SMEs on superior indigenous food and beverage. The main research data were obtained by distributing the questionnaires. It uses path analysis to determine the direct and indirect effect using the LISREL software. The results showed that transformational leadership has a positive and significant effect on SMEs’ innovation and performance directly and indirectly. Transactional leadership has a direct positive and insignificant effect on SMEs’ innovation and performance. However, transactional leadership was found to have an indirect positive and significant effect on SMEs’ performance. In conclusion, transformational leadership is more important for improving SMEs’ performance in Indonesia than transactional. These results provide a practical contribution for SMEs’ leaders to improve transformational leadership, which is oriented towards charisma, intellectual stimulation, and individual consideration. AcknowledgmentThe researcher thanked the Ministry of Research, Technology and Higher Education, Republic of Indonesia, for funding this research.
Highlights
Small and medium enterprises (SMEs) are among the leading forces that drive economic development in Indonesia
The results showed that transformational leadership has a positive and significant effect on SMEs’ innovation and performance directly and indirectly
For SMEs to succeed in improving their performance, SMEs must have good innovation
Summary
Small and medium enterprises (SMEs) are among the leading forces that drive economic development in Indonesia. According to the data obtained from the Ministry of Cooperatives and SMEs, the contribution of SMEs in 2017 is as follows: 1) 99.99% business units, 2) 97.02% of labor, 3) 60% of Gross Domestic Product (GDP), 4) 14.17% of nonoil exports, and 5) 58.18% of investments These show that SMEs have great potential in mobilizing economic activities. Effective leadership can help to improve the organizational performance in situations where the organization faces a lot of new problems and challenges. Several studies show that SMEs faces problems related to leadership styles that reduce organizational performance because they do not identify effective or ineffective leaders (Nazarian, Soares, & Lottermoser, 2017). Despite the wider quantity of research on leadership, only a few studies have analyzed the indirect effect of both transformational and transactional leadership on SMEs performance with innovation as a mediator (Md Saad & Mazzarol, 2010; Ur Rehman, Bhatti, & Chaudhry, 2019). The problem in this research is “What kind of leadership is more important for improving SMEs’ performance with innovation as a mediating variable?”
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