Effect of transformational and transactional leadership on SMEs in Indonesia

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.