Innovating employees: linking ‘psychological contract types’ and ‘innovative work behaviour’–mediating role of ‘leader-member exchange’ and ‘work engagement’

Abstract

The contemporary business environment, characterised by hyper-competition and rapid technological advancement, presents critical challenges for sustaining employee engagement. This study investigates the influence of psychological contract types on innovative work behaviour (IWB) among service sector employees, with leader–member exchange (LMX) and work engagement examined as key motivational mechanisms. Data from 398 respondents, Structural Equation Modelling (SEM) was conducted through SPSS and SmartPLS to test the proposed relationships. The findings confirm that LMX and work engagement significantly mediate the association between psychological contracts and IWB. Anchored in the Job Demand–Resource model, the study highlights the importance of providing organisational resources and leadership support to facilitate workplace innovation. Drawing on the Broaden-and-Build theory, results demonstrate that supportive leadership and meaningful work experiences foster positive emotions, which in turn promote innovative behaviour. The study emphasises that cultivating relational contracts through people-centric policies—such as career development initiatives, skill enhancement, competency building, and job rotation—is critical for sustaining an innovative climate. The research contributes to theory and practice by reinforcing the role of leadership and organisational culture in shaping innovation outcomes. Limitations and directions for future inquiry are outlined, with particular emphasis on examining these dynamics across Asian contexts, including India.