“Effect of transformational and transactional leadership on SMEs in Indonesia”

Leadership has an important role in achieving the SMEs’ innovation and performance. One of the great concepts of leadership styles is the Burns’ (1978) concept, which di-vides leadership into two: transformational and transactional. This study analyzed the direct and indirect effect of transformational and transactional leadership on SMEs’ performance. This was conducted in seven regencies/cities in East Java Province, with 165 SMEs on superior indigenous food and beverage. The main research data were obtained by distributing the questionnaires. It uses path analysis to determine the direct and indirect effect using the LISREL software. The results showed that transformational leadership has a positive and significant effect on SMEs’ innovation and performance directly and indirectly. Transactional leadership has a direct positive and insignificant effect on SMEs’ innovation and performance. However, transactional leadership was found to have an indirect positive and significant effect on SMEs’ performance. In conclusion, transformational leadership is more important for improving SMEs’ perfor- mance in Indonesia than transactional. These results provide a practical contribution for SMEs’ leaders to improve transformational leadership, which is oriented towards charisma, intellectual stimulation, and individual consideration.


INTRODUCTION
Small and medium enterprises (SMEs) are among the leading forces that drive economic development in Indonesia. According to the data obtained from the Ministry of Cooperatives and SMEs, the contribution of SMEs in 2017 is as follows: 1) 99.99% business units, 2) 97.02% of labor, 3) 60% of Gross Domestic Product (GDP), 4) 14.17% of nonoil exports, and 5) 58.18% of investments. These show that SMEs have great potential in mobilizing economic activities. Conversely, SMEs are constantly faced with competitive pressure due to globalization; therefore, there is a need for improved innovation and performance (Khaliq, C. Rehman, Roomi, S. Rehman, & Irem, 2014).
The highly competitive and rapidly changing environment enhance the importance of leadership in achieving a competitive advantage over their competitors to improve organizational performance. Effective leadership plays an important role to determine the success or failure of organization (Tourish, 2014). Effective leadership can help to improve the organizational performance in situations where the organization faces a lot of new problems and challenges. Several studies show that SMEs faces problems related to leadership styles that reduce organizational performance because they do not identify effective or ineffective leaders (Nazarian, Soares, & Lottermoser, 2017).
Besides, the widely developed leadership paradigm has attracted numerous practitioners and academics. Burns (1978) reported that leadership is distinguished into two types: transformational and transactional. Subsequently, several studies concerning their direct effects on SMEs' innovation and performance have been conducted. The results from previous studies show that numerous research gaps can be raised as a problem.
Transactional leaders generate sufficient confidence in followers and support them in completing their tasks. They acknowledge follower's needs and desires but also explain how those needs will be fulfilled if follower performs the expected performance. However, transactional leadership can be satisfying and effective in a limited way. Instead, transformational leadership substantially adds to the impact of transactional leadership (Bass, 1985). Due to the ineffectiveness of contingent negative reinforcement and several other reasons, transactional leadership is regarded as producing in expected performance with little possibility to achieve significant improvement in effort and results. Transformational leadership, in contrast, results in broader change according to effort, performance, and development.
Despite the wider quantity of research on leadership, only a few studies have analyzed the indirect effect of both transformational and transactional leadership on SMEs performance with innovation as a mediator (Md Saad & Mazzarol, 2010; Ur Rehman, Bhatti, & Chaudhry, 2019). Theory Resource-Based View (RBV) states that a company's strategic assets, such as an innovative organizational culture, affect its performance (Barney, 1991). An innovative organizational culture is considered as one of the strategic assets that will help a company improve its performance.
SMEs need to utilize its potential properly while depicting good leadership to improve its innovation and performance. The selected SMEs were those situated in Probolinggo City, Probolinggo, Lumajang, Jember, Bondowoso, Situbondo, and Banyuwangi Regencies because they have exclusive indigenous food and beverage businesses. Therefore, the problem in this research is "What kind of leadership is more important for improving SMEs' performance with innovation as a mediating variable?"

LITERATURE REVIEW
Transformational leadership drives innovation in two ways. Firstly, it can boost the motivation of the employees (intrinsic) by stimulating creativity, which is the primary key to innovation (Shin & Zhou, 2003). Secondly, it offers intellectual stimulation, thereby encouraging employees to think "outside the box" (Elkins & Keller, 2003  Transactional leadership is considered an important indicator to measure company performance. It focuses on maintaining the status quo to increase company revenue (Bass, 1985). In some Asian countries such as India and Malaysia, it significantly influences SMEs' performance (Singh,  It improves performance through innovation's mediating role, which is one of the company's strategic assets (Barney, 1991

AIMS AND HYPOTHESES
This research aims to analyze the one having the greatest contribution to improving SMEs' performance and innovation among the transformational and transactional leadership. Therefore, the hypotheses in this study are:

METHODS
This research involves all the entire 280 foods and beverage SMEs in Probolinggo City, Probolinggo, Lumajang, Jember, Bondowoso, Situbondo, and Banyuwangi Regencies. This sector was chosen because it is one of the government's main focuses in implementing the "Making of Indonesia 4.0" program. The seven regencies or cities were selected because they excelled more in this sector than in the eastern development corridors.
This research applied a proportionate sampling method to determine the relative size of each regency/city. The number of samples was detected using the Slovin formula with an error rate of 5%, and 165 SMEs were obtained. The unit of analysis is the leader, entrepreneur, owner, or manager of the SMEs. Data collection was obtained from questionnaires shared to the respondents from April to June 2019, with a 5-point Likert scale adapted from the appropriate literature.
According to Burns (1978), transformational leadership provides stimulation and inspiration for employees to achieve extraordinary results. On the contrary, transactional leadership offers financial rewards following the productivity generated by employees. The measurement of these variables was adapted from a study conducted by Aslan et al. (2011). Therefore, this research focuses on three dimensions of transformational leadership: charisma, intellectual stimulation, and individual consideration. It also focuses on two dimensions of transactional leadership, such as contingent reward and exception-passive management.
Innovation is the company's ability to adopt new ideas, products, and processes successfully. The measurement of these variables is adapted from a questionnaire developed by Ciang Wu (2017), which consists of three dimensions: product, process, and organizational innovation. Performance is defined as the company's achievement, and the variables were measured from the research conducted by Murat, Ar. and Baki (2011) and McDermott and Prajogo (2012). Its dimensions are measured based on the market shares, sales, and profits of the competitors.
This study used path analysis to determine the direct and indirect effect of transformational and transactional leadership on SMEs' performance, with innovation serving as its mediator, using the LISREL software for hypothesis testing.

RESULTS
Based on the instrument validity test results on the variables such as transformational and  transactional leadership, innovation, and performance, a correlation value of p-value < α(0.05) was obtained; therefore, all items are declared valid. Following the instrument reliability test results, the Cronbach Alpha coefficient of > 0.60 was determined; therefore, the variables were declared reliable. The results from the validity and reliability tests are shown in Table 1.
According to Table 2, several conclusions were drawn from the respondents' general description based on gender, age, marital status, educational background, and duration of business. First, most respondents were women (81.8%). Second, most were between the ages of 41-50 years (54.5%). Third, almost all the respondents were married (96.4%). Fourth, they are mostly dominated by senior high school (39.4%) and junior high school (32.1%) graduates. Fifth, the duration of the business is 6-10 years (44.8%).
According to the normality test results, the entire variables were normally distributed, shown by the p-value of skewness and kurtosis, which is determined as > 0.05. Likewise, multivariate normality shows the p-value of skewness and kurtosis to be 0.750 > 0.05. This indicates that the data are normally distributed.

Contingent reward
Employees support the leader 0.495 The leader offers an appreciation 0.644 The leader appreciates good work 0.785

Exception-passive management
A leader executes an action after a bad situation 0.624 Unprepared leader unless under coercion 0.718 The leader intervenes when an issue becomes serious 0.375 Innovation 0.846

Product innovation
The company introduced or triggered new product innovation 0.911

Process innovation
The company introduced or triggered new process innovation 0.877

Organizational innovation
The company introduced or triggered new organizational innovation 0.837 Performance 0.908

Market share
Compared to competitors, the company has better market share 0.911

Sales
Compared to competitors, the company has better sales 0.950

Profit
Compared to competitors, the company has better profit 0.895 The results from the direct influence test are shown in Table 3. The entire model consists of 5 direct paths; 3 of them have a significant effect, while the remaining 2 have a non-significant effect. Therefore, hypotheses 1, 2, and 7 are accepted, while 4 and 5 were rejected.
The results from testing the indirect effect are shown in Table 4. Generally, the two indirect path models have a significant effect; therefore, hypotheses 3 and 6 are accepted. Table 5 shows the test results from the direct, indirect, and total effect. Each independent variable's total effect is stated as follows: 29% of transformational and 11% of transactional leadership.

DISCUSSION
According to Table 3, the data analysis results show the t-value of 3.77, which is above the critical ratio (1.96); therefore, H1 is accepted at the level of α = 5%. It was discovered that transformational leadership has a positive and significant effect on SMEs' innovation. This means that transformational leadership boosts SMEs' innovation. . Also, the evidence is provided, which shows that SMEs' innovation is achieved through transformational leadership.
The data analysis in Table 3 shows that the t-value is 1.72, which is above the critical ratio (1.645); therefore, H2 is accepted at the level of α = 10%. Therefore, transformational leadership has a positive and significant effect on SMEs' performance. This means that this type of leadership boosts SMEs' performance. Furthermore, most SMEs' leaders who filled out the research questionnaire were women (81.8%). Lopez-Zafra, Garcia-Retamero, and Martos (2012) reported that transformational leadership is determined by femininity; in other words, women tend to be more transformative. Subsequently, this is the . Conversely, this study is consistent with the study conducted by Bass and Riggio (2006), which stated that transformational leaders could incite their employees to achieve better performance. Note: * and ** show significance at 5% and 10% levels, respectively.  Table 4 shows that the results from data analysis show that the t-value is 4.00, which is above the critical ratio (1.96); therefore, H3 is accepted at the level of α 5%. Transformational leadership has a positive and significant effect on SMEs' performance in accordance with an innovative medium. This supports the findings from 2 previous studies (Md Saad & Mazzarol, 2010;Ur Rehman et al., 2019). From the data shown in Table 5, the total effect of transformational leadership on SMEs' performance offers a greater value than the total and direct effects of 0.29 and 0.16, respectively. Therefore it provides a greater contribution than the effect. Contributions made by innovation serve as a mediator between transformational leadership and the performances of SMEs. This study also discovered that transformational leadership has a direct and indirect positive and significant effect on SMEs' innovation and performance. Therefore, it was concluded that innovation mediators trigger an influence on SMEs' performance.

Figure 2. The path coefficient of direct and indirect effects
In accordance with the data analysis in Table 3, the t-value is 1.43, which is below the critical ratios of 1.96 and 1.645; therefore, H4 is rejected at α = 5% and 10%. Transactional leadership has a positive and insignificant effect on SMEs' innovation. This shows that this leadership style could not improve SMEs' innovation. This is in line with the studies carried out by Aslan  However, this study is based on SMEs in the manufacturing sector, particularly food and beverages. Although different outcomes are expected, assuming the research is conducted on SMEs in the manufacturing and service sectors.
In  Table 4 shows the data analysis results where the t-value is 1.95, which is above the critical ratio of 1.645; therefore, H6 is accepted at α = 10%. Transactional leadership has a positive and significant effect on SMEs' performance based on innovative mediators. These findings support the results from previous research (Ur Rehman et al., 2019). Table 5 shows that transactional leadership's total effect on SMEs' performance offers a greater value than its direct influence (total and direct effects are 0.11 and 0.06, respectively). Therefore, its contribution is more important than direct effect and serves as a mediator between transactional leadership and SMEs' performance. The findings from this study show that it directly has a positive and insignificant effect on SMEs' performance. However, it has an indirect positive and significant effect on SMEs' performance (through innovation variables). Therefore, the influence of transactional leadership on SMEs' performance is triggered by innovation mediators.
Based on the data analysis results in Table 3, the t-value is 4.75, which is above the critical ratio of 1.96; therefore, H7 is accepted at the level of α = 5%. Innovation has a positive and significant effect on SMEs' performance. This means that it boosts SMEs' performance. The respondents' responses show that the innovative variable has two indicators stated in the good enough category and 1 in the good category. Besides, all the performance variables are in a good category. These findings provide evidence that shows that indicators such as product, process, and organizational innovation have a significant influence on SMEs' performance measured by market shares, sales, and profits. Empirically, these data are following previous studies that examined its effect on SMEs' performance using different indicators of measurements (

CONCLUSION
For SMEs to succeed in improving their performance, SMEs must have good innovation. An appropriate leadership style supports sMEs that can innovate. According to Burns (1978), there are two types of leadership styles: transformational and transactional. The path analysis results revealed that transformational leadership has a positive and significant effect on SMEs' innovation and performance. However, transactional leadership directly has a positive and insignificant effect on SMEs' performance. Subsequently, it has an indirect positive and significant effect on SMEs' performance through innovative mediators. This means that innovation plays an important role in the relationship between transactional leadership and SMEs' performance. Additionally, transformational leadership has a greater total effect (29%) than transactional leadership (11%). Therefore this type of leadership plays an important role in improving SMEs' performance in Indonesia. The recommendations that can be given are that the government should facilitate training to improve leadership. The government can design training programs and mentoring for sustainable and effective SMEs. The program can be oriented towards enhancing charismatic and transformational leadership, stimulates intellectuality, and emphasizes individual considerations so that SMEs can increase innovation and performance. In conclusion, two limitations were determined in this study. First, the samples taken are only from the manufacturing sector, specifically the food and beverage industries. Second, the study was conducted in only seven regencies or cities located in East Java Province. Therefore, further research on the manufacturing and service sectors covering a wider area at the national level needs to be conducted to generalize the results.