THE INFLUENCE OF INCLUSIVE LEADERSHIP ON WORKPLACE INNOVATION IN SMES—A DUAL MEDIATION ANALYSIS OF WORK ENGAGEMENT AND INTELLECTUAL STIMULATION

Abstract

SMEs make a major contribution to the economy, yet scarcity of resources often restricts their ability to innovate. They contribute more than 40% to the national GDP, provide employment to over 80% of the non-agriculture workforce, and play a crucial role in poverty alleviation and regional development. These firms generate a large share of GDP and jobs, but still struggle with weak finances, poor R&D setup, staff leaving, and little institutional support for innovation. The present research explores how inclusive leadership influences workplace innovation among employees working in SMEs. The study further examines the mediating mechanisms of work engagement and intellectual stimulation. The study uses social exchange, job demand-resources and transformational leadership ideas to explain work engagement and intellectual stimulation. Adopting a quantitative causal and cross-sectional approach as suggest by cavana et al. (2001). Data were gathered from 300 SMEs employees through online survey using convenience sampling technique. Measurement included inclusive leadership 9 items (Carmeli et al ;2010) work engagement 4 items (Schaufeli & Bakker, 2010), Intellectual stimulation 5 items (Avolio & Bass ,2002), and workplace innovation 3 items (De jong and Den Hartog, 2010) on five-point likert  scale. Analysis was done through PLS-SEM via smart PLS 4. The measurement model demonstrated strong reliability (Cronbach Alpha 0.779 to 0.929, CR above 0.70), convergent validity (AVE 0.549-0.824) and discriminant validity (HTMT below 0.85). Structural results confirmed all hypothesized paths: IL to WE β=0.579, t=10.44; IL to IS β=0.701, t=18.37; IL to WI β=0.196, t=2.71; WE to WI β=0.320; IS to WI β=0.354, all p<0.01. Indirect effect IL->IS->WI β=0.248, t=5.08 was significant. Explained variance with R2 value of 0.556 for workplace innovation suggests that inclusive leadership serves as a low-cost intervention for SMEs. The findings suggest that inclusive leadership is a cost-effective and sustainable strategy for SMEs to foster innovation without heavy investment in R&D. The study provides theoretical contributions by integrating three theories and practical implications for SMEs owners, managers and policymakers in Pakistan.