Grounded in the Resource-Based View (RBV) and Dynamic Capabilities Theory (DCT), this study examines the direct and mediated effects of Inspirational Motivation—a core dimension of transformational leadership—on the social and economic performance of small and medium-sized enterprises (SMEs) in developing countries, with innovation as the mediating construct. Using Partial Least Squares Structural Equation Modeling (PLS-SEM) with bootstrapping (5000 sub-samples) to test seven hypotheses, the findings reveal that Inspirational Motivation significantly enhances social performance and fosters innovation, but does not directly influence economic performance. Instead, innovation plays a pivotal mediating role, linking Inspirational Motivation to both social and economic outcomes. These results highlight leadership-driven innovation as a critical pathway for achieving multidimensional sustainability in SMEs. The study advances transformational leadership theory by underscoring its conditional impact, while advocating innovation-centric strategies for SME development. Theoretical and practical implications are offered for leadership training, innovation enablement, and performance management, alongside recognition of limitations related to research design, scope, and generalizability.
Al-Dhobee et al. (Tue,) studied this question.