Competitive advantage is essential for firm survival in this competitive environment.Innovation is vital to attain competitive advantage over competitors. Leadership plays animportant role in affecting innovation. The main objective of this study is to investigatewhether it is a myth or a reality that transformational leadership promotes innovation.Transformational leadership is conceptualized using five dimensions: individualized influence(attributed), individualized influence (behavior), inspirational motivation, intellectual stimulation, and individualized consideration. On the other hand, innovation isconceptualized as the firm's propensity to develop new or improved products. Therelationship of transformational leadership and innovation is hypothesized as positiveassociation. Cluster sampling technique is used to collect data. The data is collected from 400 manufacturing sector small and medium enterprises (SMEs) of Pakistan. Structural EquationModeling (SEM) is applied to test the hypothesis. The results of the study demonstrate theexistence of a positive significant influence of transformational leadership on innovation.
Keywords: Transformational Leadership, Innovation, SMEs, SEM