This study examines the influence of transformational leadership on employee innovative performance in Saudi Arabian manufacturing small and medium enterprises (SMEs), investigating the mediating role of employee innovative behavior and the moderating effect of psychological empowerment. A quantitative research design was employed using stratified sampling across 13 Saudi regions. Data were collected from 374 managers and leaders in innovation-active manufacturing SMEs through structured questionnaires. Partial Least Squares Structural Equation Modeling (PLS-SEM) was used for hypothesis testing. All five hypotheses were supported. Results demonstrated significant positive relationships between transformational leadership and both employee innovative behavior (? = 0.312, p < 0.001) and employee innovative performance (? = 0.186, p = 0.002). Employee innovative behavior significantly mediated the transformational leadership-performance relationship (? = 0.123, p = 0.001). Psychological empowerment significantly moderated the transformational leadership-performance relationship (? = 0.142, p = 0.017), with stronger effects when empowerment levels were high. The findings provide evidence-based guidance for SME managers to develop transformational leadership capabilities and psychological empowerment initiatives. For policymakers, results support leadership development programs aligned with Saudi Vision 2030's economic diversification goals through enhanced innovation performance in manufacturing SMEs. This research contributes to leadership and innovation literature by providing empirical evidence from an emerging economy context. It extends Full Range Leadership Theory and Self-Determination Theory by demonstrating the effectiveness of transformational leadership in Saudi family-dominated SMEs and identifying psychological empowerment as a key boundary condition for leadership effectiveness in fostering innovation.
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