📄 social_science

Enhancing innovation behavior through entrepreneurial leadership and knowledge management: the role of human capital

This study of 178 employees in Indonesian manufacturing SMEs demonstrates that human capital significantly mediates the positive relationship between entrepreneurial leadership and knowledge management on employee innovation behavior, thereby extending Social Cognitive Theory to the context of developing economies.

Original authors: Ni Made Wahyuni, Luh Kade Datrini, Komang Dharmawan

Published 2026-06-30

📖 4 min read☕ Coffee break read

CC BY 4.0

Original authors: Ni Made Wahyuni, Luh Kade Datrini, Komang Dharmawan

Original paper licensed under CC BY 4.0 (https://creativecommons.org/licenses/by/4.0/). ✨ This is an AI-generated explanation of the paper below. It is not written or endorsed by the authors. For technical accuracy, refer to the original paper. Read full disclaimer

Imagine a small manufacturing business in Indonesia as a busy kitchen. The goal of this kitchen is to create something new and delicious every day (innovation). The researchers of this paper wanted to figure out what makes the cooks (employees) come up with these new recipes.

They looked at three main ingredients:

The Head Chef (Entrepreneurial Leadership): The boss who sets the vision and takes risks.
The Recipe Book (Knowledge Management): How the kitchen shares tips, tricks, and information.
The Cooks' Skills (Human Capital): The actual talent, training, and confidence of the staff.

Here is what the study found, explained simply:

1. The Head Chef Doesn't Cook the Meal Directly

You might think that if a boss is super energetic, visionary, and daring (Entrepreneurial Leadership), the employees will immediately start inventing new things.

The Finding: The study discovered that the "Head Chef" style does not directly make the cooks invent new recipes.
The Analogy: Imagine a coach screaming instructions from the sidelines. Just hearing the coach doesn't automatically make the player score a goal. The coach's energy alone isn't the magic switch.

2. The Secret Ingredient: Upgrading the Cooks' Skills

So, how does the Head Chef actually help? The study found that the Head Chef's job is to upgrade the cooks' skills (Human Capital).

The Finding: A visionary boss does successfully build up the team's confidence, knowledge, and abilities.
The Analogy: The Head Chef doesn't cook the meal; they buy better ingredients, send the cooks to culinary school, and boost their confidence. Once the cooks are more skilled and confident, then they start inventing new dishes.
The Result: The boss's influence works indirectly. They build the team's "Human Capital," and that is what leads to innovation.

3. The Recipe Book Works Best When Shared

The researchers also looked at "Knowledge Management"—how the company shares information.

The Finding: When a company actively shares knowledge (like holding meetings with customers or sharing tips between staff), it directly helps employees innovate.
The Analogy: If the kitchen has a shared digital notebook where everyone writes down new techniques, the cooks can use those notes to create new dishes immediately.
The Double Effect: This knowledge sharing also helps upgrade the cooks' skills (Human Capital), which leads to even more innovation.

The Big Picture: The "Middleman"

The most important discovery of this paper is the role of Human Capital (the employees' skills and mindset).

Think of Human Capital as a translator or a bridge:

The Boss (Leadership) speaks the language of "Vision."
The Innovation (New Ideas) is the language of "Action."
The Employees (Human Capital) are the translators.

The study shows that the Boss's vision cannot jump straight to Innovation. It must first be translated into the employees' skills and confidence.

Direct Path: Boss $\rightarrow$ Innovation (This path was weak/non-existent in this study).
Indirect Path: Boss $\rightarrow$ Boosts Employee Skills $\rightarrow$ Innovation (This path was strong and successful).

Summary for the General Audience

If you run a small business and want your team to be more innovative:

Don't just shout "Be Creative!" (Being a visionary leader alone doesn't force innovation).
Invest in your people. Use your leadership to train them, build their confidence, and give them the right tools (Human Capital).
Share knowledge. Make sure your team has a system to share tips and learn from each other.

The paper concludes that in small Indonesian manufacturing businesses, innovation happens when leaders focus on building up their people's skills first. The people are the engine; the leader just fuels the engine, and the fuel (knowledge) helps the engine run better.

Technical Summary: Enhancing Innovation Behavior through Entrepreneurial Leadership and Knowledge Management

Problem Statement
Small and Medium Enterprises (SMEs) are critical to economic development, particularly in Indonesia, yet they face high failure rates and performance challenges characterized by slow sales growth and deteriorating managerial capabilities. While Employee Innovation Behavior (IB) is recognized as a vital internal capability for organizational survival and performance, the mechanisms driving IB remain underexplored. Previous literature presents inconsistent findings regarding the direct impact of Entrepreneurial Leadership (EL) and Knowledge Management (KM) on IB. Some studies suggest EL directly stimulates innovation, while others find insignificant effects or even negative outcomes due to employee anxiety. Similarly, the relationship between KM and IB is ambiguous, with some evidence suggesting KM does not guarantee innovation results. Furthermore, the role of Human Capital (HC) as a mediating mechanism in these relationships within the context of developing country SMEs is largely unexamined. This study addresses these gaps by investigating how EL and KM influence IB through the mediation of HC.

Methodology
The study employs a quantitative research design using cross-sectional survey data collected from 178 employees working in manufacturing SMEs across eight districts and one city in Bali, Indonesia. The sample was drawn from businesses with at least 10 employees and valid business licenses, selected via convenience sampling. Data collection occurred between May and August 2024 using a five-point Likert scale questionnaire.

The research model was analyzed using Partial Least Squares Structural Equation Modeling (PLS-SEM) via SmartPLS 4.0. The theoretical framework integrates Social Cognitive Theory (SCT) to explain the environmental influence of leadership on individual behavior and the Theory of Planned Behavior (TPB) to understand KM's role in shaping attitudes. The study tested seven hypotheses:

H1: EL positively impacts IB.
H2: EL positively impacts HC.
H3: KM positively impacts IB.
H4: KM positively impacts HC.
H5: HC positively impacts IB.
H6: HC mediates the relationship between EL and IB.
H7: HC mediates the relationship between KM and IB.

Reliability and validity were established with Cronbach's alpha and Composite Reliability (CR) values exceeding 0.7, Average Variance Extracted (AVE) above 0.5, and Heterotrait-Monotrait (HTMT) ratios below 0.90, confirming no multicollinearity issues.

Key Results
The structural model analysis yielded the following findings:

Direct Effects:
- EL → IB (H1): Rejected. Entrepreneurial leadership did not have a statistically significant direct effect on innovation behavior ( $\beta = 0.079, p = 0.075$ ).
- EL → HC (H2): Supported. EL has a significant positive effect on Human Capital ( $\beta = 0.214, p \leq 0.000$ ).
- KM → IB (H3): Supported. Knowledge Management has a significant positive direct effect on Innovation Behavior ( $\beta = 0.208, p = 0.005$ ).
- KM → HC (H4): Supported. KM significantly and positively affects Human Capital ( $\beta = 0.470, p \leq 0.000$ ).
- HC → IB (H5): Supported. Human Capital has a strong positive effect on Innovation Behavior ( $\beta = 0.553, p \leq 0.000$ ).
Mediation Effects:
- H6 (EL → HC → IB): Supported. HC fully mediates the relationship between EL and IB. The indirect effect is significant ( $\beta = 0.119, p \leq 0.000$ ), indicating that EL influences IB primarily by first enhancing HC.
- H7 (KM → HC → IB): Supported. HC mediates the relationship between KM and IB. The indirect effect is significant ( $\beta = 0.260, p \leq 0.000$ ).
Model Fit: The model explains 35.6% of the variance in Human Capital and 53.6% of the variance in Innovation Behavior, indicating substantial predictive relevance.

Key Contributions and Significance
The paper claims several theoretical and practical contributions:

Theoretical Advancement: This study is presented as the first to demonstrate the mediating role of Human Capital in the relationship between Entrepreneurial Leadership, Knowledge Management, and Innovation Behavior within Indonesian industrial SMEs. It expands the application of Social Cognitive Theory (SCT) by asserting that leadership acts as an environmental factor that stimulates knowledge cognition and behavioral reactions through the development of human capital.
Resolution of Inconsistencies: The findings clarify the "black box" of the EL-IB relationship. The study suggests that while EL may not directly trigger innovation, it is crucial for building the human capital necessary for employees to innovate. This explains previous inconsistencies where direct EL-IB links were found to be insignificant.
Contextual Relevance: The research highlights the specific importance of HC in SMEs within a developing country context, where resource constraints are high. It validates that investing in HC is a strategic mechanism for translating leadership and knowledge management into tangible innovation outcomes.
Practical Implications: For managers and policymakers, the study suggests that simply adopting entrepreneurial leadership styles is insufficient without concurrent investment in employee competence and skills. Leaders must focus on developing HC (through training, vision sharing, and risk encouragement) to foster innovation. Similarly, KM activities should be designed not just for information storage but to actively enhance employee competencies, which in turn drives innovation.

Limitations
The authors acknowledge that the study is limited to manufacturing SMEs in Bali, Indonesia, which may restrict the generalizability of the findings to other industries or regions. Additionally, the cross-sectional nature of the data limits causal inferences, and the study did not test other potential mediating variables beyond HC. The authors note that future research should explore these relationships in broader contexts and investigate other factors influencing the EL-IB link.