Building Innovative and High-Performing SMEs in Pakistan: Human Resource Practices, Transformational Leadership and Employee Innovative Behaviour

Abstract

Article history:Received 02 July 2026 Received in revised form 04 August 2026 Accepted 12 August 2026 This study investigates the influence of human resource practices and transformational leadership on employee innovative behaviour and organisational performance in small and medium-sized enterprises (SMEs) in Pakistan. Drawing on Human Capital Theory and Social Exchange Theory, the study examines the mediating role of employee innovative behaviour in explaining these relationships. A quantitative research design was adopted using survey data collected from 277 SMEs located in the Gujrat, Sialkot and Gujranwala industrial cluster of Pakistan. Responses were obtained from HR managers, general managers, and owners using a five-point Likert-scale questionnaire. Partial Least Squares Structural Equation Modelling (PLS-SEM) with SmartPLS 4 and 5,000 bootstrap resamples was employed to test the proposed hypotheses. The results confirmed the reliability and validity of the measurement model and revealed that human resource practices and transformational leadership significantly enhance employee innovative behaviour and organisational performance. Employee performance and reward management exhibited the strongest positive effect on employee innovative behaviour, while transformational leadership demonstrated the greatest direct influence on organisational performance. Furthermore, employee innovative behaviour partially mediated the relationships between human resource practices, transformational leadership, and organisational performance. Although the study is limited by its cross sectional design and its focus on SMEs within a single industrial region of Pakistan, the findings provide important theoretical and practical contributions. The results suggest that SME managers should strengthen human resource practices and adopt transformational leadership behaviours to foster employee innovation and improve organisational performance. By integrating Human Capital Theory and Social Exchange Theory, this study extends the understanding of the mechanisms through which human resource practices and leadership contribute to organisational success in SMEs and provides empirical evidence from Pakistan's SME sector.