CEO transformational andtransactional leadership andorganizational innovation

The moderating role ofenvironmental dynamism

Bhaskar PrasadDepartment of Management, University of Antwerp, Antwerp, Belgium, and

Paulina JunniDepartment of Strategy, BI Norwegian Business School, Oslo, Norway

AbstractPurpose – Organizational innovation is critical for firm competitive advantage. Yet, we do notknow enough about the relationship between leadership and organizational innovation. The purpose ofthis paper is to examine the influence of chief executive officer (CEO) transformational andtransactional leadership on organizational innovation. The authors examine the moderating role ofenvironmental dynamism.Design/methodology/approach – The authors collected survey-based data from top managementteam members in 163 companies in services, construction, manufacturing and other industries in theUSA. The authors used multiple regression analyses to test the study hypotheses.Findings – The empirical findings indicate that CEO transformational and transactional leadershipbehaviors positively influence organizational innovation. However, organizations benefit more fromtransformational leadership in dynamic environments.Originality/value – This study highlights the role of CEO leadership behavior in the pursuit oforganizational innovation. Significantly, the study shows that both transformational and transactionalleadership can enhance organizational innovation. However, their effectiveness is contingent onenvironmental dynamism. This contributes to the firm innovation literature by clarifying how specifictypes of CEO leadership influence organizational innovation in different environmental conditions.Keywords Innovation, Leadership, OrganizationPaper type Research paper

IntroductionOrganizational innovation is critical for firm competitive advantage and performance(Lam, 2005). Globalization and rapid technological changes are forcing firms to paymore attention to innovation in order to grow and to survive in an increasinglydynamic environment (Damanpour and Aravind, 2006). While several studies havefocussed on firm innovation relating to the introduction of new products or services(Damanpour and Aravind, 2006; Foss et al., 2011; Gumusluoglu and Ilsev, 2009), fewerstudies have examined organizational innovation (Camisón and Villar-López, 2014).However, organizational innovations are critical for firm competitive advantagebecause they concern changes in organizational processes and practices that are aimedat better meeting organizational goals (Lam, 2005) as a response to changes in theenvironment (Damanpour and Aravind, 2006). As the business environment isbecoming more dynamic, the ability of organizations to rapidly adapt to environmentalchanges is becoming increasingly important (Lumpkin and Dess, 2001). In this study,we therefore focus on organizational innovation, which can broadly be understood

Management DecisionVol. 54 No. 7, 2016pp. 1542-1568©EmeraldGroup Publishing Limited0025-1747DOI 10.1108/MD-11-2014-0651

Received 22 November 2014Revised 13 August 201515 January 2016Accepted 2 May 2016

The current issue and full text archive of this journal is available on Emerald Insight at:www.emeraldinsight.com/0025-1747.htm

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as the generation and implementation of new organizational structures, processes orpractices (Hipp and Grupp, 2005; Lam, 2005; Damanpour, 1996).

Leadership has been put forth as a key driver of organizational innovation(Wang and Rode, 2010; Gumusluoglu and Ilsev, 2009). Through their actions, leaderscan guide organizations toward becoming more innovative. Dedicated leaders initiateand implement changes that help a firm pursue organizational innovation moreeffectively (Hogan and Kaiser, 2005). The chief executive officer (CEO) of the firm is in aparticularly central position to support innovation by influencing firm strategicdecisions (Papadakis, 2006), policies and procedures (Wales et al., 2013). CEOs are alsoin a key position to drive organizational innovation through their leadership behavior(Makri and Scandura, 2010). CEOs can be seen as key agents for promoting changes inthe firm that support innovation (Eggers and Kaplan, 2009) by displaying commitmentto it (Ling et al., 2008) and by communicating about its importance to firm members(Papadakis, 2006).

While prior studies suggest that CEO behavior can influence product and serviceinnovations (Makri and Scandura, 2010; Tang et al., 2011), we know less about itinfluences organizational innovation (Gumusluoglu and Ilsev, 2009; Hsiao and Chang,2011). We believe that CEOs play an important role in influencing organizationalinnovation through the kind of leadership behavior that they exhibit. More specifically,we put forward that CEO transformational and transactional leadership are key ininfluencing organizational innovation. Transformational leadership involves providinginspirational motivation and establishing oneself as a role model by gaining the trustand confidence of one’s followers (Cole et al., 2009; Bass, 1998). Transactional leadershipconcerns appealing to subordinates’ self-interest by establishing clear exchangerelationships with them (Bass et al., 2003). Transformational leadership has beensuggested to enhance organizational innovation through intellectual stimulation andby encouraging openness among organizational members (Vera and Crossan, 2004).In turn, transactional leadership has been argued to support organizational learningand renewal by providing organizational members with clear goals, expectations andrewards (Vera and Crossan, 2004). While both kinds of leadership behavior cantheoretically support organizational innovation in different ways, empirical evidenceon their respective roles is inconsistent and incomplete: transformational leadershiphas been found to enhance firm innovativeness in general (e.g. Garcia-Morales et al.,2006; Jung et al., 2008). However, its effect has also been shown to be moderated byother characteristics of the firm’s leadership ( Jansen et al., 2008), by the firmenvironment (Vera and Crossan, 2004), and by the characteristics of firm members(Pieterse et al., 2010). While research on the influence of transactional leadership onorganizational innovation is scarce, its influence has also been suggested to becontingent on the firm environment (Vera and Crossan, 2004) and on the characteristicsof firm members (Pieterse et al., 2010). Taken together, these limited and inconsistentfindings indicate that we do not fully understand how transformational andtransactional leadership are related to organizational innovation. Furthermore, moststudies have examined the influence of transformational and transactional leadershipat the level of immediate supervisors or organizational subunits; we know less aboutthe role of CEO leadership on organizational innovation ( Jung et al., 2008; Mumfordet al., 2002). Therefore, we aim to examine the influence of CEO transformationaland transactional leadership behaviors on organizational innovation within firms.This contributes to the firm innovation literature by elaborating on the distinct roles ofdifferent CEO leadership behaviors on organizational innovation.

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The empirical evidence on transformational and transactional leadership alsoindicate that their effects are contingent on other factors, suggesting a contingencyperspective on leadership (Pieterse et al., 2010). Prior research has paid particularattention to the moderating effect of the firm environment on the effectiveness ofleadership on organizational performance (e.g. Pearce, 2004; Pearce and Conger, 2003;Hambrick and Mason, 1984). In specific, the effects of leaders’ behavior on firmoutcomes can be intensified or dampened depending on what kind of environment thefirm operates in (Ensley et al., 2006). Environmental dynamism concerns the rate ofchange and the degree of instability that firms face in their environment (Dess andBeard, 1984). It has been suggested as a significant moderator of the relationshipbetween leadership and several firm outcomes such as exploratory and exploitativeinnovation ( Jansen et al., 2009), the rate of new product introduction (Nadkarni andChen, 2014) and new venture performance (Ensley et al., 2006). However, the influenceof environmental dynamism on the relationship between leadership and organizationalinnovation requires further investigation (Schilke, 2015). Functioning in a dynamicenvironment demands agility and flexibility from the leadership to make sure thatthe organization is responding to emerging changes (Yitzhack Halevi et al., 2015).Thus, the suitability of different leadership behaviors is likely to be contingent onenvironmental dynamism. In this study, we therefore examine the moderating roleof environmental dynamism on the relationship between CEO leadership behaviors(transformational and transactional) and organizational innovation. This contributes tothe literature on organizational innovation by elaborating on the boundary conditionsof the influence of different CEO leadership behaviors on organizational innovation.

In the following section, we review the relevant literature on organizationalinnovation and develop our study hypotheses. Then, we describe the study methods.This is followed by a section that describes the findings obtained from the empiricalanalyses. We conclude by discussing the study findings, implications, limitations andavenues for future research.

Literature review and hypothesesOrganizational innovationThe term organizational innovation is often used to refer to the creation or adoption of anidea or behavior that is new to the organization (Damanpour and Aravind, 2006; Daft,1978; Damanpour and Evan, 1984; Damanpour, 1996). However, the currently availableliterature on organizational innovation is rather diverse and fragmented, and differentareas of research have developed their own approaches and understandings of thephenomenon (Lam, 2005). This has resulted in different definitions and interpretations oforganizational innovation. The literature can be broadly classified into three differentstreams: the structural, the process and the organizational change perspectives.

The structural perspective on organizational innovation concerns the link betweenorganizational structure and the propensity of an organization to innovate (Mumfordet al., 2002; Burns and Stalker, 1961; Mintzberg, 1979). Research within this stream hasfocussed on structural features, emphasizing the role of organizational structure infacilitating the generation and implementation of innovative ideas within firms (Raischand Birkinshaw, 2008). Organizational structures vary depending on their degree ofe.g. formalization, standardization and centralization. They influence how informationflows, how tasks and responsibilities are distributed and how decisions are madewithin the firm (Mumford et al., 2002; Burns and Stalker, 1961; Mintzberg, 1979). This,in turn, can influence organizational innovation. For instance, Chen and Chang (2012)

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show that formalization indirectly both enhances and dampens organizationalinnovation through its effects on absorptive capacity and decision speed, both ofwhich are important drivers of organizational innovation: while formalization enhancesabsorptive capacity by establishing more effective knowledge sharing routineswithin the firm, it slows down decision speed by reducing decision making flexibility.Their study also shows that centralization diminishes organizational innovation byreducing firm absorptive capacity. The authors argue that this effect is due to the lack ofinvolvement of lower level organizational members in important decisions in highlycentralized firms. A high degree of organizational standardization has also beensuggested to reduce firm innovativeness by creating rules and routines thatorganizational members are afraid to break (Morgan, 1993). Collectively, these studiesindicate that organizational structures play an important role in the development ofinnovations within organizations.

The process perspective treats innovation as the outcome of process features.Researchers taking this perspective aim to analyze and understand the manner inwhich organizations develop new ideas to solve problems (Felin and Hesterly, 2007;Mintzberg 1979). In this perspective, researchers have focussed on organizationalprocesses, such as organizational learning routines, which can facilitate the generationand implementation of innovative ideas (Felin and Hesterly, 2007). For instance,Eisenhardt and Tabrizi (1995) show that adaptive processes within the firm that rely onimprovisation, experimentation and flexibility support the development of productinnovations. Organizations can also enhance innovativeness by adopting processesthat encourage challenging existing assumptions and experimenting with new ideas(Furr and Dyer, 2014; Hernandez-Mogollon et al., 2010). Together, these studies suggestthat organizational processes play a key role in how innovations develop and emergewithin organizations.

Research within the organizational change perspective on firm innovation hasattempted to understand how organizations address changes in the environment(Child, 1997; Davila et al., 2006; Garcia-Morales et al., 2006; Romanellie and Tushman,1994). In this stream, researchers have tended to focus on managerial practices toovercome organizational change resistance, which can be detrimental to organizationalinnovation. For example, organizations can reduce change resistance by encouragingopen communication among firm members that minimizes speculations and wrongperceptions (Agboola and Salawu, 2010). Change resistance can also be reduced byintroducing managerial practices that present learning opportunities that help“unfreeze” the perceptions and mindsets of the organizational members (Choi andRuona, 2010; Lewin, 1947). By managing change resistance, firms are better able tofacilitate the generation and implementation of innovative ideas (Foss et al., 2011), andto proactively interact with their environment (Makri and Scandura, 2010; Romanellieand Tushman, 1994). These studies point to the importance of implementingmanagerial practices minimizing organizational change resistance for the facilitation oforganizational innovation.

Overall, research within these three streams point to the complexity oforganizational innovation as it is influenced by organizational structures, processesand practices. However, research within each of these streams has tended to developindependently from the others, creating a somewhat fragmented picture oforganizational innovation. In order to incorporate the richness of these researchstreams, our study draws on all of three perspectives. More specifically, we understandorganizational innovation as consisting of managerial actions aimed at renewing and

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improving organizational structures, processes and practices with the aim to furtherorganizational goals. Further, although these three perspectives have providedimportant findings concerning how organizational structures, processes and changemanagement practices can influence organizational innovation, studies addressing theinfluence of leadership are lacking in general, and particularly concerning the influenceof CEO transformational and transactional leadership (Pieterse et al., 2010). We turn tothese in the following section.

CEO leadership and organizational innovationCEO leadership has an important part to perform in promoting organizationalinnovation. By introducing supportive organizational practices that influence theinnovation capabilities and behaviors of organizational members (Makri and Scandura,2010), CEOs can attempt to create conditions within the firm that facilitate thegeneration and implementation of organizational innovations. Even if the CEO is notdirectly involved in developing organizational innovations, he/she plays an importantrole in generating a climate in the organization that favors experimentation and theintroduction of new ideas, processes, procedures or structures (Trung et al., 2014).This puts CEO leadership in a central position in promoting organizational innovationwithin the firm (Hambrick and Mason, 1984).

Empirical studies show that CEOs influence organizational outcomes through theselection and implementation of specific firm strategies (Tang et al., 2011, 2015).CEO leadership has also been suggested to play an important role in facilitatingorganizational innovation ( Jung et al., 2008). For instance, CEOs play an importantrole in identifying key changes in the environment that need to be addressed throughorganizational renewal and innovation (Garcia-Morales et al., 2006). CEOs alsopromote initiatives within the firm in order to develop new processes, practicesand structures within the organization. Further, CEOs can help to mitigate concernsamong organizational members regarding the uncertainties and complexitiesinvolved in pursuing innovations (Pieterse et al., 2010). By communicating acompelling shared vision, CEOs can motivate and empower organizational membersto pursue innovations (Dess and Picken, 2000; Senge, 1990). Garcia-Morales et al.(2006) also stress the important role that the CEO plays in communicating the needfor organizational innovation in concrete terms in order to gain understanding,acceptance and support from organizational members. The willingness on the part oforganizational members to bring forward new ideas has been shown to be key inenhancing organizational innovation (Gumusluoglu and Ilsev, 2009). We thereforebelieve that the CEO plays a critical role in encouraging and empoweringorganizational members to innovate.

In order to understand how particular CEO leadership behaviors influenceorganizational innovation, we focus on the roles of CEO transformational andtransactional leadership. While several studies have addressed how transformationaland transactional leadership influence organizational outcomes in general (Fry andKriger, 2009; Hater and Bass, 1988; Bass, 1990; Bass et al., 2003), our understandingabout the role of these leadership behaviors in organizational innovation is limited(Pieterse et al., 2010), particularly concerning the role of CEO leadership ( Jung et al.,2008; Mumford et al., 2002). Drawing on existing studies about the influence of thesetwo types of leadership behavior on organizational outcomes, we develop our studyhypotheses concerning the influence of CEO transformational and transactionalleadership on organizational innovation in the following sections.

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CEO transformational leadership and organizational innovationThe theory of transformational leadership was introduced by Burns (1978) overthree decades ago. Since then, researchers have shown great interest in establishinghow it influences organizational outcomes ( Judge and Piccolo, 2004). In contrast tomore traditional forms of leadership that build on an exchange relationship such astransactional leadership, transformational leadership aims to address the intrinsicneeds of followers. In order to achieve this, the transformational leader needs toestablish himself/herself as a role model by gaining the trust and confidence of his/herfollowers (Cole et al., 2009; Bass, 1998), and by aligning the personal and socialidentification of his/her followers with the goals and values of the leader and theorganization (Bass et al., 2003; Shamir et al., 1993). In doing so, transformational leadersaim to offer followers a purpose that transcends their self-interest by appealing to theirvalues, ideals, and interests (Bass and Avolio, 1990; Vera and Crossan, 2004). This isintended to motivate followers to contribute to the organization’s performance(Bass et al., 2003). In addition to addressing follower motivation, transformationalleaders also act as role models or mentors, and try to empower their followers(Avolio et al., 1999). This is intended to enhance follower capabilities (Avolio et al., 1999)and self-confidence (Bass et al., 2003) and elevate the ability the followers to contributeto achieving organizational goals (Bass, 1985).

In the theory developed by Burns (1978), he describes transformational andtransactional leadership behaviors as the opposite ends of a continuum. In contrast,Bass (1985) argues that they represent distinct leadership behaviors that work best incombination (Bass et al., 2003; Vera and Crossan, 2004). In line with Bass andcolleagues, we understand transformational and transactional leadership as orthogonalconstructs that can exist alongside each other. In 1985, Bass (1985) started developing abehavioral framework of transformational leadership. This framework has developedsignificantly over the years, and one of the most recent and accepted versions describetransformational leadership as consisting of four dimensions, namely, idealizedinfluence, inspirational motivation, intellectual stimulation and individualizedconsideration (Avolio et al., 1999):

(1) Idealized influence represents the degree to which followers respect, trust andidentify with the leader. In order to gain the confidence and respect of thefollowers, transformational leaders need to appeal to the ideals, values andemotions of the followers. A transformational leader also represents animportant role model that that displays the kinds of behaviors that are expectedfrom followers, such as aligning ones behaviors with the values and purpose ofthe organization, and going beyond one’s self-interest in order to meetorganizational goals.

(2) Inspirational motivation concerns the extent to which a leader is able tocommunicate a compelling shared vision to the followers. Leaders exhibitinginspirational motivation exhibit optimism and excitement about the goals andfuture plans of the organization. They also try to provide meaning to thefollower’s tasks and motivate them to strive for higher performance.

(3) Intellectual stimulation represents the degree to which the leader encouragesfollowers to challenge the status quo, to take risks and to put forward newperspectives for solving problems and completing tasks. This is intended tostimulate follower creativity and innovativeness.

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(4) Individual consideration concerns the extent to which the leader listens to andattends to the individual needs of each follower. It also involves creatinglearning opportunities for followers, and trying to stimulate their developmentthrough coaching and mentoring activities.

We expect that CEOs that display these dimensions of transformational leadershipwill be able to support organizational innovation by enhancing the motivation andability of organizational members to be creative and innovative: first, by means ofidealized influence (Cole et al., 2009), the CEO will be able to convince and motivateorganizational members concerning the need for organizational change and innovation.This will help overcome potential resistance on the part of organizational membersconcerning the development and adoption of new organizational structures, processesand practices. It also ensures that the efforts of the CEO to bring about organizationalinnovation will be supported by the firm members. Second, by providing inspirationalmotivation, transformational leaders develop enthusiasm among organizational membersto work toward attaining organizational goals in order to create a desirable future(Bass, 1998). Thus, by emphasizing the importance of organizational innovation,CEOs can motivate organizational members to be more creative and to develop newideas and solutions concerning organizational structures, processes and practices.Third, transformational leaders that provide intellectual stimulation increase themotivation and ability of organizational members to think out-of-the-box. This kind ofleadership behavior also encourages organizational members to critically evaluatethe firm status quo (Bass, 1998). Thus, through intellectual stimulation, CEOs canchallenge organizational members to put forward ideas about how to renew andimprove existing organizational structures, processes and practices to better meetorganizational goals. Finally, the individualized consideration provided bytransformational leaders helps to develop the capabilities of organizational members(Bass et al., 2003), and it and creates learning opportunities that can stimulate creativethinking. Thus, by addressing the personal needs of the organizational members, CEOsmay be able to develop a supportive climate in which organizational members feel thatthey can learn, experiment and be creative. This will further encourage organizationalmembers to generate and implement new organizational structures, processes andpractices. We therefore put forward the following hypothesis:

H1. CEO transformational leadership will be positively related to organizationalinnovation.

CEO transactional leadership and organizational innovationBefore the introduction of transformational leadership theory into the literature (Bass,1985; Burns, 1978), transactional leadership was considered to be the most effectiveform of organizational leadership (Bass et al., 2003). In contrast to transformationalleadership that emphasizes selflessness and the intrinsic needs of organizationalmember, transactional leadership appeals to subordinates’ self-interest and focussesmore on extrinsic needs by establishing a clear exchange relationship with them(Bass et al., 2003). This type of leadership involves managing in the more conventionalsense by clarifying subordinate responsibilities, rewarding them for meeting objectivesand correcting them for failing to meet objectives (Bass, 1999). By establishing cleargoals and expectations, by providing constructive feedback, and by distributingappropriate rewards when goals are met, transactional leaders aim to generate higherlevels of performance among organizational members (Avolio et al., 1999; Bass, 1985;

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Howell and Hall-Merenda, 1999). This form of leadership therefore involves closemonitoring of organizational members in order to quickly identify areas that requireimprovement and to take corrective action (Bass et al., 2003). At the same time as hestarted developing a framework concerning transformational leadership behavior,Bass (1985) also worked on identifying behaviors related to transactional leadership(Bass et al., 2003). One of the most recent versions of this framework consists oftwo dimensions, namely, contingent reward and active management by exception(Den Hartog et al., 1997; Avolio et al., 1999). This version does not include the dimension“passive management by exception,” because it has not been found to correlatepositively with transactional leadership behavior (Den Hartog et al., 1997):

(1) contingent reward represents the degree to which the leader provides cleargoals and expectations, and rewards organizational members for satisfactoryperformance; and

(2) active management by exception concerns the extent to which the leadermonitors and attends to followers’ mistakes and failures to meet standards.

We expect both of these dimensions of CEO transactional leadership behavior to enhanceorganizational innovation: first, by means of contingent rewards, transactional leadersestablish clear goals, expectations and rewards (Avolio et al., 1999) concerningorganizational innovation. This builds commitment from organizational members to theaccomplishment of specific tasks (Avolio et al., 1999) related to pursuing innovativeactivities. It also ensures that organizational members are aware of the expectation togenerate new ideas and solutions concerning organizational structures, processes andpractices. Further, it clarifies to organizational members that the generation andimplementation of innovative ideas is valued by the organization, and will therefore beproperly rewarded. Consequently, we expect that CEOs who exhibit transactionalleadership by providing contingent rewards will be able to support organizationalinnovation. Second, by means of active management by exception, transactional leadersclosely monitor organizational members in order to make sure that organizational goalsare met (Pearce and Sims, 2002). This ensures that any departures from expectedbehaviors by organizational members are identified and necessary steps are taken torectify the situation (Pearce et al., 2003), such as providing constructive feedback.The monitoring and feedback activities create transparency concerning the processesand procedures undertaken to complete tasks within the organization. This is likely tohelp leaders and organizational members to identify areas that need to be improved(Avolio et al., 1999), not only concerning their own tasks, but also regarding thestructures, processes and practices of the organization (Bass and Avolio, 1993). Further,it ensures that organizational members are reminded about the need to generate andimplement new ideas. Consequently, we expect that CEOs who display transactionalleadership behavior through active management by exception will be able to enhanceorganizational innovation. We thus put forward the following hypothesis:

H2. CEO transactional leadership will be positively related to organizationalinnovation.

The moderating role of environmental dynamismEnvironments are considered to be dynamic when they are characterized byunpredictability and they are going through rapid changes in the demand for firmproducts and services, technologies, and in the demand or supply of materials

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( Jansen et al., 2006). Accordingly, environmental dynamism can be understood as therate of change and the degree of instability faced by an environment (Dess and Beard,1984). Companies operating in dynamic environments face greater levels ofunpredictability and turbulence than those in more stable environments, becausefirm current products and services become outdated at a faster pace ( Jansen et al., 2005,2006; Sorensen and Stuart, 2000). This causes the leadership of firms operating indynamic environments to face greater difficulties in accurately evaluating present andfuture states of the environment (Ensley et al., 2006). Dynamic environments thereforereduce the predictability of future outcomes and generate more uncertainty for bothfirm leaders and firm members. Such environments also place greater demands on theorganization in terms of gathering and processing information, and in quicklyresponding and adapting to new information (Simsek, 2009; Pearce and Conger, 2003).Such intensive information processing requires the involvement of organizationalmembers on multiple levels in information collection and interpretation (Simsek, 2009),which increases the complexity of communication within the firm (Pearce, 2004).One the one hand, the increased complexity of intra-firm communication can createchallenges for the leadership in terms of conveying a clear and coherent vision of thefuture and direction to organizational members (Pearce and Sims, 2002). On the otherhand, it can also generate opportunities for the firm leadership to generate a sense ofurgency about the need for organizational change and innovation (Pearce and Conger,2003). Thus, the kind of environment that the firm operates in is likely to influence theability of the firm leadership to drive organizational members to generate andimplement innovative ideas. Accordingly, we expect that environmental dynamisminfluences the effectiveness of CEO transformational and transactional leadership inthe pursuit of organizational innovation.

CEO transformational leadership, environmental dynamism and organizationalinnovationDynamic environments present both challenges and opportunities for firms. On the onehand, environmental dynamism is likely to make the firm competitive advantage lesssustainable, because existing products, services and technologies become obsoletemore quickly ( Jansen et al., 2006; Simsek, 2009). On the other hand, this dynamismcreates opportunities for change and innovation as it pushes the firm to renew itsproducts, services, technologies and processes. Such conditions call for the firm torespond to environmental changes in agile and new ways, and transformationalleadership has been suggested to support organizational renewal (Osborn et al., 2002).We expect that CEO transformational leadership will be particularly effective infostering organizational innovation in a highly dynamic environment. Through idealizeinfluence, i.e. by gaining the trust and confidence of organizational members(Antonakis and House, 2014), CEOs can mitigate the worries and concerns on the partof organizational members concerning the organizational changes that are needed inorder to foster innovation. Further, transformational leaders take a long-termperspective and offer organizational members a compelling vision ( Judge and Piccolo,2004). When faced with a highly uncertain situation this kind of idealized influence(Hsiao and Chang, 2011) as displayed by the CEO is likely to empower and motivateorganizational members to drive forward organizational change. Previous researchalso suggests that, when faced with a dynamic environment, organizational membersbecome inspired to find new ways of working when CEO is able to communicate a clearsense of direction (Pearce et al., 2003). Further, through individual consideration,

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transformational leaders are able to understand the perspectives and tasks of theorganizational members ( Judge and Bono, 2000). This helps the transformationleader to relate to the tasks and activities of the organizational members and makeshim/her able to provide meaning and a sense of purpose to the activities performed byeach member (Pieterse et al., 2010), even when it is difficult to evaluate how theseactivities will influence future performance. This is likely to make transformationalleadership (Osborn et al., 2002) as displayed by the CEO particularly effective insituations characterized by turbulence, uncertainty or crisis. The sense of uncertaintyproduced by a highly dynamic environment may even create opportunities for thetransformational leader to push organizational members to challenge the organization’sstatus quo (Pawar and Eastman, 1997), and to put forward new ideas and alternatives.This kind on intellectual stimulation as displayed by the CEO is therefore likely tofurther support the ability and motivation of organizational members to make changesin organizational structures, processes and practices. Therefore, we put forward thefollowing hypothesis:

H3. Environmental dynamism moderates the relationship between CEOtransformational leadership and organizational innovation such that a higherlevel of environmental dynamism strengthens the positive relationship betweenCEO transformational leadership and organizational innovation.

CEO transactional leadership, environmental dynamism and organizational innovationIn contrast to transformational leadership, we expect CEO transactional leadership tobe less effective in a dynamic environment. By offering contingent rewards, this kind ofleadership behavior focusses on clarifying the expectations, rules, procedures andrewards to organizational members (Osborn et al., 2002). Further, active managementby exception emphasizes the way in which organizational members carry out theiractivities and tasks (Birasnav, 2014; Antonakis and House, 2014). By being precise,systematic and detail oriented, transactional leaders are able to quickly detectdeviations in the expected behavior on the part of organizational members, and toremedy this through constructive feedback or other corrective actions ( Judge andPiccolo, 2004). This type of leadership has been suggested to support firm innovation ina stable work environment (Pieterse et al., 2010), where there are fewer changes incustomer preferences and technologies. The precise and formalized goals andstructures offered by transactional leaders (Pearce and Sims, 2002) concerning thepursuit of organizational innovation can support and motivate organizational membersto innovate in more stable environments. However, we do not expect this kind of CEOleadership behavior to be effective in dynamic environments: in environments whereconditions change rapidly, the goals and guidelines offered by transactional leadersmay not always be suitable for the situation at hand, and may therefore not produce thedesired results ( Jansen et al., 2009). This is likely to weaken the motivational effect ofcontingent rewards on pursuing organizational innovation. Further, close monitoringof organizational members, which is an important part of active management byexception (Pearce et al., 2003), is likely to be less effective in a dynamic environment,because the causal links between the behavior of the organizational members andorganizational outcomes is more ambiguous than in a stable setting (Simsek, 2009).Therefore, CEO transactional leaders are likely to find it difficult to provide cleardirection and guidelines to organizational members to generate and implementnew organizational structures, practices and processes. The ambiguity surrounding

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the link between the behavior of organizational members and performanceoutcomes are also likely to weaken the motivational effect of contingent rewards inthe pursuit of organizational innovations, because organizational members will feelless confident about their ability to achieve these goals. Hence, we put forward thefollowing hypothesis:

H4. Environmental dynamism moderates the relationship between CEOtransactional leadership and organizational innovation such that a higherlevel of environmental dynamism weakens the positive relationship betweenCEO transactional leadership and organizational innovation.

MethodsResearch setting and data collectionWe collected survey-based data in order to test our study hypotheses. Prior to sendingout the survey, it was pilot-tested on a group of 125 industry representatives belongingto the top management, including chief financial officers, chief marketing officers, chiefinnovation officers and chief information officers in different industry sectors (services,construction, manufacturing and other areas). This sample of top managers wasrandomly selected form the ReferenceUSA database, which contains basic informationabout businesses that are based in the USA. The pilot test participants were inpositions comparable to those of the respondents of the survey. We modified andimproved the survey items based on the comments provided by the pilot testparticipants. There was no overlap between the sample used in the pilot test and withthe sample used in this study.

After the pilot test, 1,000 organizations were randomly selected from theReferenceUSA database. Based on the information available in the database, membersof top management team (TMT) were addressed. Prior to sending out the survey,respondents were contacted via e-mail and confidentiality was guaranteed to eachparticipant in order to reduce the risk of a social desirability bias. Then, an electronicmail survey, including a cover letter explaining the purpose of research, wasdistributed to one respondent of the TMT in each organization. The organizationalpositions of the respondents included chief financial officers (18.5 percent),chief marketing officers (18.4 percent), chief information officers (15.8 percent), chieftechnology officers (15.6 percent), chief innovation officers (14.9 percent) and executivedirectors (16.8 percent). Prior research indicates that respondents belonging to theTMT are aware of organizational strategies, structures, processes and practices (Pearceet al., 2003), because they play an important role in initiating, directing andimplementing them (Pearce and Sims, 2002). This puts the respondents in a goodposition to answer questions about firm innovativeness, i.e. changes in firm structures,processes and practices. TMT members also usually report directly to the firm CEO,and interact extensively with him/her concerning strategic matters of the firm.This also makes the TMT members well suited for answering survey questions aboutthe CEO’s leadership behavior.

The first round of data collection took place in 2013; the focus was on collecting datarelating to the independent and moderating variables, i.e. leadership behavior andenvironmental dynamism. Responses were obtained within three months. In 2014,approximately one year after the first round of data collection, a second survey wasconducted in order to collect responses for the dependent variable, i.e. organizationalinnovation; these data were obtained within three months.

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We received 163 responses in total from the TMT members. The overall responserate for the sample used in this study 16.3 percent. The organizations in our samplewere operating in different sectors including services (34.5 percent), construction(26.2 percent), manufacturing (20.4 percent) and other areas (18.9 percent).

Differences between respondents and non-respondents for the final sample weretested for non-response bias. The t-tests did not show any significant differences in thenumber of full-time employees or in firm age between these groups, indicating thatnon-response bias was not a problem in our sample.

MeasuresIndependent variablesCEO transformational leadership. We measured CEO transformational leadership byapplying the transformational leadership subscale of the leadership questionnaireMLQ-5X developed by Bass and Avolio (1995). This scale consists of 20 items rated ona seven-point Likert type scale ranging from 1 (strongly disagree) to 5 (strongly agree).The four dimensions of transformational leadership consist of five items each foridealized influence, inspirational motivation, intellectual stimulation and individualizedconsideration.

We found that the four dimensions of CEO transformational leadership were highlycorrelated (average r¼ 0.73; po0.01). This is in line with previous research, whichshows that these dimensions have failed to exhibit discriminant validity in predictingoutcomes (Judge and Bono, 2000; Bycio et al., 1995). Following previous studies (Bonoand Judge, 2003; Jung et al., 2003), we therefore created a composite index for CEOtransformational leadership by calculating the average value of the 20 items, and weused this index in subsequent analyses. Cronbach’s α was 0.93.

CEO transactional leadership. We measured CEO transactional leadership by usingthe transactional leadership subscale of the leadership questionnaire MLQ-5Xdeveloped by Bass and Avolio (1995). This scale consists of eight items rated on aseven-point Likert type scale ranging from 1 (strongly disagree) to 7 (strongly agree).The two dimensions of transactional leadership include four items each for contingentrewards and active management by exception. We also found that these twodimensions were highly correlated (average r¼ 0.78; po0.01). Therefore, following thesame reasoning as in the previous measure, we calculated the average value of the eightitems in order to create a composite index for CEO transactional leadership, which wasused in subsequent analyses. Cronbach’s α was 0.73.

Moderating variableEnvironmental dynamism. We measured environmental dynamism by adapting themeasure by Jansen et al. (2009). This scale consists of five items rated on a seven-pointLikert type scale ranging from 1 (strongly disagree) to 7 (strongly agree): environmentalchanges in our local market are intense, our clients regularly ask for new products andservices, in our local market, changes are taking place continuously, in a year, nothinghas changed in our market (reverse coded), and in our market, the volumes of productsand services to be delivered change fast and often. Cronbach’s α was 0.71.

Dependent variableOrganizational innovation. Because the existing literature on organizationalinnovation is very diverse, there is no consensus concerning its measurement

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(Camisón and Villar-López, 2014; Hsiao and Chang, 2011). We therefore took severalsteps in order to construct an appropriate measure of organizational innovation for thisstudy. First, we reviewed studies on organizational innovation (Daft, 1978; Damanpourand Evan, 1984; Damanpour, 1996; Lam, 2005; Raisch and Birkinshaw, 2008). Thisallowed us to identify several items concerning different aspects of organizationalinnovation, including changes in organizational structures, processes and practices.We selected six items that we considered to best capture organizational innovation; twoitems regarding changes in organizational structures, processes and practices,respectively. These items were part of the survey pilot-test that we described earlier,which included 125 top managers that were in comparable positions as the onesparticipating in the survey used in this study. We modified and improved the scaleitems based on the comments provided by the pilot test participants.

The final measure of organizational innovation that was used in this study consistsof six items concerning changes in organizational structures, processes and practices.The first two items relate to organizational structure: we renew the organizationstructure to facilitate the firm activities, we renew the communication structures tofacilitate coordination between different functions. The following two items concernorganizational processes: we renew the processes employed to execute firm activities,we implement improvements in managing the human resources. The last two itemsrelate to organizational practices: we renew practices employed to improve functionsof organizational members, we implement practices to make sure effective completionof firm activities. Cronbach’s α was 0.78.

Control variablesTo account the possible alternative explanations, control variables were included inthis study: research has shown that organizational innovation depends on the age offirm senior managers (Drazin and Schoonhoven, 1996). The logarithm of the CEO agewas therefore used in the model. Existing research also indicates that CEO tenure isnegatively related to organizational change (Makri and Scandura, 2010). Hence, weincluded a control variable based on the logarithm of the number of years that the CEOhad been working for the organization. Further, CEO gender can influence firmstrategic decisions concerning innovations (Marquis and Lee, 2013). A binary controlvariable measuring whether the CEO was male or female was therefore included. MaleCEOs were allocated the value “1” and female CEOs were allocated the value “0.” Seniorteam size has also been found to influence innovation (Siegel and Hambrick, 2005).We therefore included a measure based on the logarithm of the number of senior teammembers in each organization. Finally, firm age can also affect innovation; youngerfirms tend to be more innovative than older ones (Hannan and Freeman, 1984). Hence,we included a control variable based on the logarithm of the number of years since thefirm had been founded.

Assessment of common method varianceWe took various procedural steps to reduce the risk of common method variance.As mentioned earlier, we pilot-tested the whole survey on a group of 125 industryrepresentatives belonging to positions comparable to those of the respondents of thesurvey. We made changes in the survey items based on the respondents’ answers tothe pilot survey, in order to make the survey items clearer and more comprehensible(Podsakoff et al., 2003). In addition, when collecting the data, we included the

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independent and dependent variables in two separate surveys that were administeredone year apart. This temporal separation reduces the risk of common method variance(Chang et al., 2010; Podsakoff et al., 2003). Further, when the survey was administered,we stressed that the confidentiality of the respondents will be maintained. This stepwas aimed to reduce common method variance by reducing social desirability bias(Podsakoff et al., 2003).

We also took several statistical steps in order to rule out the risk of common methodvariance: as prescribed by Podsakoff and Organ (1986), we conducted Harman’sone-factor test using the items that were part of our conceptual model. If a single factorwould have accounted for the majority of the covariance, it would have indicated theexistence of common method bias. However, the analysis resulted in several factors, andthe first factor accounted for only 21 percent of the total variance. As another statisticalcontrol, we conducted a single unmeasured latent method factor test as recommended byPodsakoff et al. (2003), which is specifically used in studies employing single respondents.First, a confirmatory factor analysis model was specified that included the constructs inthe conceptual framework of this study. In the second model, an additional method factorwas added. The two models were then compared in order to assess the presence orabsence of common method variance. The fit statistics of the first, conceptual modelwere χ2¼ 1212.06, df¼ 498, CFI¼ 0.932, TLI¼ 0.928; RMSEA¼ 0.048, and those of thesecond model that included the additional method factor were χ2¼ 1029, df¼ 462,CFI¼ 0.938, TLI¼ 0.935; RMSEA¼ 0.051. The addition of the method factor did notgreatly improve the fit of the constructs-only model (Δχ2¼ 183.06, Δdf¼ 36, pW0.05,ΔCFI¼ 0.006, ΔTLI¼ 0.007, ΔRMSEA¼ 0.003). These analyses indicate that commonmethod variance should not have substantially influenced the study results.

Analysis and resultsTable I shows the descriptive statistics and correlations between the variables used inthis study. The correlations are in line with our hypotheses.

Regression analysesWe conducted hierarchical regression analyses to test our study hypotheses. Beforecalculating the interaction terms, the independent variables were mean centered inorder to reduce the risk of multicollinearity (Aiken and West, 1991). In addition, weassessed the risk of multicollinearity by examining the variance inflation factors (VIF)in each regression model. The maximum VIF within the models was 1.66, which isunder the cut off value of 10 (Netter et al., 1990). This indicates that multicollinearitywas not a problem in the regression analyses.

Table II illustrates the results of the regression analyses with organizational innovationas the dependent variable. It specifies four models: in Model 1, only the control variablesare included. In Model 2, the independent variables (CEO transformational leadershipand transactional leadership) and the moderating variable (environmental dynamism)are introduced. In Model 3, the first interaction term (CEO transformationalleadership×environmental dynamism) is included. Model 4 introduces the secondinteraction term (transactional leadership×environmental dynamism).

The results presented in Table II, Model 2 support H1, which puts forward apositive relationship between CEO transformational leadership and organizationalinnovation (β¼ 0.26, p o 0.01). They also support H2, which puts forward a positiverelationship between CEO transactional leadership and organizational innovation(β¼ 0.21, po0.01).

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environmentaldynamism

Mean

SD1

23

45

67

89

10

1OrganizationalInn

ovation

4.15

1.07

2CE

Oagea

3.69

0.12

−0.05

3CE

Otenu

reb

0.76

0.51

−0.12

0.14

4CE

Ogend

er0.84

0.25

0.09

0.06

0.07

5TMTsize

c0.75

0.22

0.09

0.12

0.03

0.06

6Firm

aged

2.82

0.81

0.07

0.09

0.05

0.06

0.08

7CE

Otransformationalleadership

5.28

0.79

0.45**

0.12

−0.07

0.17

0.18

0.14

8CE

Otransactionalleadership

4.81

0.71

0.41**

0.15

−0.09

0.18

0.14

0.12

0.09

9Env

ironmentald

ynam

ism

4.48

1.23

0.16

0.09

0.08

0.14

0.15

−0.08

0.12

0.18

10CE

Otransformationalleadership×

Env

ironmentald

ynam

ism

23.45

2.64

0.32*

0.08

0.12

0.06

0.12

0.07

0.08

0.12

0.08

11CE

Otransactionalleadership×

Env

ironmentald

ynam

ism

22.18

2.04

−0.27*

0.13

0.07

0.14

0.07

0.06

0.08

0.12

−0.06

0.16

Notes

:n¼163.

a Logarith

mof

ageof

theCE

O;bLo

garithm

ofyearsin

theorganizatio

n;c Logarith

mof

numberof

TMTmem

bers;dLo

garithm

ofnu

mberof

yearssincefoun

ding

.*po

0.05;**p

o0.01

Table I.Descriptive statisticsand correlationscoefficients

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In addition to these direct effects, we put forward two hypotheses concerningthe moderating effect of environmental dynamism on the relationships between CEOleadership behavior and organizational innovation. The findings in Table II, Model 3provide support forH3, showing that environmental dynamism positively moderates therelationship between CEO transformational leadership and organizational innovation( β¼ 0.23, po0.05). In other words, the positive effect of CEO transformationalleadership on organizational innovation increases with environmental dynamism. Forbetter illustrating the moderating effect of environmental dynamism on the effectivenessof CEO transformational leadership behavior, the interaction effects were graphedfollowing the procedures put forward by Cohen and Cohen (1987). CEO transformationalleadership and environmental dynamism were given the values of one standarddeviation above and below their respective means. Figure 1, which presents the plottingof this interaction, shows that transformational leadership has a strong and positive

Model 1 Model 2 Model 3 Model 4

CEO agea −0.06 −0.17 −0.19 −0.23CEO tenureb −0.09 −0.03 0.04 0.05CEO gender 0.08 0.09 0.06 0.04TMT sizec 0.12 0.09 0.07 0.05Firm aged 0.14 0.12 0.04 0.07CEO transformational leadership 0.26** 0.31** 0.24**CEO transactional leadership 0.21** 0.21** 0.19**Environmental dynamism 0.16** 0.19** 0.22**CEO transformational leadership× environmental dynamism 0.23*CEO transactional leadership× environmental dynamism −0.16**R2 0.07 0.19 0.22 0.25ΔR2 0.05 0.14 0.05 0.04F 0.84 4.85** 5.91** 4.93**Notes: n¼ 163; aLogarithm of age of the CEO; bLogarithm of years in the organization; cLogarithm ofnumber of TMT members; dLogarithm of number of years since founding. *po0.05; **po0.01

Table II.Results of

hierarchicalregression analyses-

standardizedcoefficients:

organizationalinnovation

7

6

5

4

3

2

1Transformational Leadership

Org

aniz

atio

nal I

nnov

atio

n

High EnvironmentalDynamism

Low EnvironmentalDynamism

Figure 1.Effect of interaction

between CEOtransformationalleadership andenvironmentaldynamism onorganizational

innovation

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environmentaldynamism

relationship with organizational innovation in highly dynamic environments. However,this effect is reduced in stable environments. Following Aiken and West (1991), we alsoconducted a simple slopes analysis, which showed that the simple slope of organizationalinnovativeness onto CEO transformational leadership was positive and significant whenenvironmental dynamism was high (simple slope¼ 1.32, po0.05). When environmentaldynamism was low, the relationship was not significant (simple slope¼ 0.53, ns).This provides further support for H3.

In H4, we proposed that environmental dynamism will negatively moderate thepositive relationship between CEO transactional leadership and organizationalinnovation. In support of this hypothesis, Model 4 in Table II shows that the interactionof CEO transactional leadership behavior and environmental dynamism was negativeand significant (β¼−0.16, po0.01). The interaction effect was plotted as illustratedin Figure 2. The graph shows that CEO transactional leadership is more conducive fororganizational innovation in stable environments compared to dynamic environments.We further examined the moderating effect with a simple slope analysis (Aiken andWest, 1991). The findings indicate that, CEO transactional leadership was insignificantwhen environmental dynamism was high (simple slope¼ 0.42, ns). However, CEOtransactional leadership was positive and significant when environmental dynamismwas low (simple slope¼ 1.06, po0.05). This further supports H4.

Discussion and conclusionOrganizational innovation is critical for firm competitive advantage and performance(Lam, 2005) as it allows the organization to develop and to adapt to a changingenvironment (Lumpkin and Dess, 2001). While researchers have paid much attention tofirm innovation concerning the development of new products or services (Damanpourand Aravind, 2006; Foss et al., 2011; Gumusluoglu and Ilsev, 2009), we know less aboutorganizational innovation (Camisón and Villar-López, 2014). In this study, we thereforeaimed to shed more light on the determinants of organizational innovation.

By drawing on the leadership theory, we focussed on the influence of two types ofCEO leadership behaviors, namely, transformational and transactional leadershipbehaviors. This contributes to the organizational innovation literature by elaborating

7

6

5

4

3

2

1

Org

aniz

atio

nal I

nnov

atio

n

Transactional Leadership

High EnvironmentalDynamism

Low EnvironmentalDynamism

Figure 2.Effect of interactionbetween CEOtransactionalleadership andenvironmentaldynamism onorganizationalinnovation

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on the under-examined role of leadership in organizational innovation in general (Pieterseet al., 2010), and in examining the role of CEO leadership behavior in specific, which hasbeen called for in previous research (Gumusluoglu and Ilsev, 2009; Jung et al., 2008).We also put forward that environmental dynamisms influences the effectiveness ofCEO transformational and transactional leadership behaviors on organizationalinnovation. This contributes to the organizational innovation literature by examiningthe boundary conditions of these two types of leadership behaviors, which has beencalled for in previous research (Hsiao and Chang, 2011). Overall, the results of our studyindicate that CEO leadership behavior plays an important role in organizationalinnovation. However, the effectiveness of these leadership behaviors is contingent on thedegree of environmental dynamisms. These results are discussed in greater detail below.

Our study findings provide evidence that CEO transformational leadershipcontributes to organizational innovation. This positive effect is likely to be due to theCEO’s ability to motivate organizational members (Dess and Picken, 2000) to pursueorganizational innovation. Transformational leaders put in effort to communicatean inspiring shared vision and common goals concerning the firm’s future.By communicating about the longer term firm strategy and goals, CEOs can inspireorganizational members to think about how the organization could be renewed in orderto meet future goals. CEOs that exhibit transformational leadership behaviors are alsolikely to promote risk-taking and experimentation relating to new activities, processesand tasks (Dess and Picken, 2000), which can promote organizational innovation.This may also reduce concerns among organizational members about the potentialrisks of pursuing activities in which expected results and objectives are uncertain andvague, such as in the development of a new organizational structures, processes orpractices. Taken together, CEOs that exhibit transformational leadership behaviors arelikely to play an important role in organizational innovation by enhancing the abilityand motivation of organizational members to pursue organizational innovations.Our findings are thus in line with the general firm innovation literature, which showsthat transformational leadership can support product and service innovations (Matzleret al., 2008; Jung et al., 2008), technological innovations (Chen et al., 2012), and creativity(Gumusluoglu and Ilsev, 2009; Shin and Zhou, 2003). This study also goes beyond theseprevious findings by providing evidence that CEO transformational leadership isconducive to pursuing organizational innovation in specific.

We also examined the influence of CEO transactional leadership on organizationalinnovation. Researchers have put forward that transactional leadership may decrease theability and motivation of organizational members to put forward new ideas (Bass et al.,2003), which could impede the introduction of new organizational structures, processesand practices. Our study findings call this into question by offering evidence that CEOtransactional leadership can in fact support organizational innovation. First, by providingcontingent rewards, this type of leadership can motivate organizational members to attainclear targets set by the management (Avolio et al., 1999; Bass and Avolio, 1993) related topursuing organizational innovation. Also, through active management by exception,transactional leaders can monitor and reward the implementation of the goals (Avolioet al., 1999; Bass and Avolio, 1993) related to organizational innovation. By establishing adirect positive relationship between CEO transactional leadership and organizationalinnovation, this study adds to the existing literature on firm innovation.

Even though most leadership theories implicitly suggest that the effectiveness ofvarious leadership behaviors depend on environmental circumstances (Osborn et al.,2002; Cox et al., 2003; Pearce, 2004; Pearce and Conger, 2003), little empirical

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research has examined potential moderators of the relationship between leadershipand organizational innovation. We contribute to the firm innovation literature byexamining the moderating role of environmental dynamism on the association betweenCEO transformational and transactional leadership and organizational innovation.More specifically, we found that CEO transformational leadership is more effective forenhancing organizational innovation in a dynamic environment. Transformationalleaders provide organizational members with a compelling longer term future vision(Matzler et al., 2008) and a sense of purpose and direction in their tasks and activities(Pieterse et al., 2010). They also encourage organizational members to come up withnew ideas and solutions (Shin and Zhou, 2003). Such CEO leader behaviors can thusenhance the ability and motivation of organizational members to take risks and toexperiment with new ideas in dynamic environments where future states are seen asuncertain and unpredictable. Transformational leaders may even see a dynamicenvironment as an opportunity to challenge the existing conditions in the organization(Osborn et al., 2002; Pearce et al., 2003). Taken together, these CEO leadership behaviorsare therefore likely to be particularly effective in enhancing organizational innovationin a dynamic environment.

In contrast, our study results suggest that CEO transactional leadership behavioris less effective in pursuing organizational innovation in a dynamic environment.One explanation for this finding can be that transactional leadership relies on clearexpectations concerning the outcomes, tasks and behaviors of organizational members(Pieterse et al., 2010), which can create stiff organizational routines (Cox et al., 2003) thatmay stifle innovation in dynamic environments. Further, because future states are lesscertain in a dynamic environment, the goals and guidelines offered by transactionalleaders may not lead to desired results ( Jansen et al., 2009). This can make activemanagement by exception less effective. It may also weaken the motivational effect ofcontingent rewards on pursuing organizational innovations. The empirical findingsconcerning the moderating effect of environmental dynamisms contribute to theorganizational innovation literature by showing that the effectiveness of CEOtransformational and transactional leadership differs depending on environmentalcircumstances. Taken together, the findings of our study indicate that CEOs have asignificant part to play in supporting organizational innovation through bothtransformational and transactional leadership behaviors. At the same time, they needto adapt their behavior depending on how dynamic the environment is that theirorganization is operating in.

We believe that these study findings are useful in furthering our understanding abouthow CEO leadership behaviors influence organizational innovativeness. However, thelimitations of this study need to be taken into account when interpreting the results. First,we developed a new scale in order to measure organizational innovation at the firm level.While we took several measures to ensure the validity and reliability of the measure,future studies could test the viability of the measure in other study contexts. Second,although data on the independent and dependent variables were collected one year apart,this study still represents a cross-sectional analysis of the influence of CEOtransformational and transactional leadership behavior on organizational innovation.Future studies adopting longitudinal research methods could shed more light on thesecausal relationships. Third, survey responses were collected from one member of theTMT in each firm. While this sheds light on the perspectives of the upper echelons ofthe firm, it would be valuable to combine the perspectives of the TMT with otherorganizational levels in future studies by collecting and analyzing data from multiple

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organizational levels. Fourth, our study sample included firms operating in multipleindustries. While this supports the robustness of our study findings, future studies couldexamine the influence of CEO transformational and transactional leadership behaviors offirms operating in the same industry. This would help to shed more light on the industryspecific boundary conditions of CEO leadership behavior regarding organizationalinnovation. For instance, CEOs of firms operating in creative industries or hightechnology sectors may be more involved in organizational innovation activities thanCEOs operating in less innovative sectors (Makri and Scandura, 2010). Future studiescould also examine what kinds of leadership behaviors are conducive for inter-firmcollaborations across different industries that are intended to facilitate organizationalinnovation. This would help us better understand how innovations are generated anddiffuse across industries. Fifth, our study addressed how environmental conditions,namely, dynamism, influence the effectiveness of CEO leadership behaviors. However,previous studies indicate that intra-firm conditions also influence firm innovation(Camison-Zornoza et al., 2004; Damanpour, 1992). Future studies could therefore examinethe effectiveness of different kinds of CEO leadership behaviors on organizationalinnovation depending on intra-firm factors such as firm size (Waldman et al., 2001),age (Elenkov and Manev, 2005), structure ( Jung et al., 2008) and culture (Chen et al., 2012).The internal and external environments of the firm are also likely to influence theeffectiveness of different leadership behaviors together. Thus, they could be examined incombination in future studies. Finally, while we examined the influence of important CEOleadership antecedents on organizational innovation, we did not address to what extentorganizational innovation contributes to organizational performance. This could beexamined in future research.

Our study findings present significant implications for management that can helpfirms in their pursuit of organizational innovation. CEO leadership behavior exercisedin the firm has and important role to play in innovation. More specifically, bothtransformational and transactional leadership can support organizational innovationby providing longer and shorter term goals, inspirational and instrumental motivation,intrinsic and extrinsic rewards, and by empowering and overseeing firm members,respectively. However, the firm management needs to be mindful that the effectivenessof these two CEO leadership behaviors differs depending on the external context thatthe firm operates in: CEO transformational leadership can be particularly effective in ahighly dynamic business environment, as it pushes organizational members to be moreflexible, think outside of the box, and to consider the long-term goals of the firm.In contrast, in a more stable environment, CEO transactional leadership is moreappropriate for driving organizational innovation, as it offers a transparent, hands-onand detail-oriented approach that can push organizational members to engage ininnovation related activities when expectations regarding their goals and activities aremore stable and predictable.

To conclude, this study contributes to the emerging literature on organizationalinnovation in several ways. We conceptualized organizational innovation as involvingchanges in organizational structures, practices and processes. This contributes to theinnovation literature by integrating perspectives on organizational innovation fromseveral diverse perspectives. Based on our conceptualization, we carefully developeda new measure for organizational innovation at the firm level, which showed a highlevel of construct reliability and validity. Drawing on our conceptualization andmeasure of organizational innovation and on the literature on organizationalleadership, we developed and tested a theoretical framework concerning the

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influence of two kinds of CEO leadership behaviors (transformational andtransactional leadership) on organizational innovation. While leadership behaviorshave been linked to product and service innovations (Elenkov et al., 2005; Tang et al.,2011), researchers have called for studies examining their influence on organizationalinnovations in general (Pieterse et al., 2010) and concerning the role of CEOleadership in specific (Gumusluoglu and Ilsev, 2009; Jung et al., 2008). By addressingthis call for research, our study contributes to the firm innovation literature byaddressing the research gap concerning the influence of CEO leadership behavioron organizational innovation. Further, we examined the moderating effect ofenvironmental dynamism on these leader behaviors, which has also been called for inprevious research (Hsiao and Chang, 2011). This contributes to the organizationalinnovation literature by shedding light on the boundary conditions of the influence ofdifferent CEO leadership behaviors on organizational innovation in differentorganizational environments.

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Further reading

Dill, W.R. (1958), “Environments as an influence on managerial autonomy”, AdministrativeScience Quarterly, Vol. 2 No. 4, pp. 409-443.

Schilke, O. (2014), “On the contingent value of dynamic capabilities for competitive advantage:the nonlinear moderating effect of environmental dynamism”, Strategic ManagementJournal, Vol. 35 No. 2, pp. 179-203.

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Van de Ven, A., Polley, D., Garud, S. and Venkataraman, S. (1999), The Innovation Journey,Oxford University Press, New York, NY.

Volberda, H.W. and Van Bruggen, G.H. (1997), “Environmental turbulence: a look into itsdimensionality”, in Bemelmans, M.T.A. (Ed), Dynamiek in Bedrijfsvoering, NOBO, Enschede,pp. 137-145.

Wischnevsky, J.D., Damanpour, F. and Méndez, F.A. (2011), “Influence of environmental factorsand prior changes on the organizational adoption of changes in products and intechnological and administrative processes”, British Journal of Management, Vol. 22 No. 1,pp. 132-149.

About the authorsBhaskar Prasad is currently working as an Assistant Director in Ernst & Young, Global DeliveryServices, Trivandrum, India. Bhaskar Prasad is the corresponding author and can be contacted at:jbhaskarp@gmail.com

Paulina Junni is currently working as an Associate Professor, the Department of Strategy,BI Norwegian Business School, Oslo, Norway.

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