The Effect of Transformational Leadership on Exploratory and Exploitative Innovation: The Mediating Role of Entrepreneurial Orientation

Abstract The importance of transformational leadership in driving innovation has been emphasized through extensive research; however, the specific mechanisms that connect transformational leadership to innovation capabilities, including both exploitative and exploratory innovation, remain largely unexplored. This study seeks to examine whether entrepreneurial orientation serves as a mediator in the connection between transformational leadership and both exploratory and exploitative innovation within Ethiopian manufacturing firms, utilizing upper echelon theory and resource-based theory as its foundation. To achieve this, a quantitative research approach employing structural equation modelling was utilized, encompassing a sample of 624 individuals drawn from 208 medium and large-scale manufacturing companies. The firms in the sample were chosen through a stratified sampling technique from an overall pool of 600 medium and large manufacturing entities. The findings of the study indicate that transformational leadership significantly contributes to promoting both exploratory and exploitative innovation, revealing a strong relationship. Additionally, transformational leaders enhance exploratory innovation by prioritizing entrepreneurial orientation. Nevertheless, entrepreneurial orientation does not influence the connection between transformational leadership and exploitative innovation. Consequently, this study adds to upper-echelon research by elucidating the pathway through which transformational leaders facilitate exploratory and exploitative innovations, while also theoretically establishing and empirically confirming the distinct mediating role of entrepreneurial orientation. JEL Code: M12, L26, O31