Leadership and organizational learnings role on innovation and

performance: Lessons from Spain

J. Alberto Arago n-Correa
a,b,
*
, V ctor J. Garc a-Morales
b
, Eulogio Cordo n-Pozo
b
a
Rotterdam-Erasmus University, The Netherlands
b
University of Granada, Spain
Received 3 January 2005; received in revised form 7 April 2005; accepted 27 September 2005
Available online 15 December 2005
Abstract
Leadership style has been traditionally emphasized as one of the most important individual influences on firm innovation. Scholars are now
paying growing attention to the possibility that the collective capability of organizational learning plays a key role in determining innovation. We
propose that leadership style, an individual feature, and organizational learning, a collective process, simultaneously and positively affect firm
innovation. A structural equation model and data from 408 large firms in four sectors supported our hypotheses. Organizational learning had a
stronger direct influence on innovation than CEO transformational leadership for our sample; however, leadership had a strong, significant
influence on organizational learning, indirectly affecting firm innovation. Additionally, innovation positively and significantly influenced
performance. Organizational learning also positively affected performance, but interestingly mainly through innovation.
D 2005 Published by Elsevier Inc.
Keywords: Innovation; Organizational learning; Transformational leadership; Performance; Organizational capabilities
1. Introduction
Market orientation and subsequent firm innovation are
widely recognized to be essential for the survival and growth
of organizations (Bello, Lohtia, & Sangtani, 2004; Damanpour
& Gopalakrishnan, 2001; Hurley & Hult, 1998). Porter (1990)
suggested that by the late twentieth century, most industrial
economies had moved to an innovation-driven stage, during
which firms competed on how to rapidly and profitably
innovate. In this context, it is especially important to gain a
better understanding of factors influencing the successful
development of firm innovations.
Different definitions of innovation have been proposed (e.g.,
Knight, 1967; Zaltman, Duncan, & Holbek, 1973). We
accepted for our work the definition of innovation stated by
the Product Development and Management Association
(PDMA, 2004): A new idea, method, or device. The act of
creating a new product or process. The act includes invention
as well as the work required to bring an idea or concept into
final form.
Although firm innovation is widely prescribed as a means to
improve organizational performance, many firms do not or
cannot properly develop it. Researchers have urged attention to
what makes it possible for firms to develop innovation, looking
for answers beyond semiautomatic stimulus-response pro-
cesses (Zollo & Winter, 2002, p. 341). Many authors have
focused their attention on analyzing whether specific manage-
rial characteristics influence the generation of innovation in
organizations, while others have focused on analysis of
organizational factors. We want to highlight the simultaneous
influence of both kinds of factors.
Leadership style has been emphasized as one of the most
important individual influences on firm innovation, because
leaders can directly decide to introduce new ideas into an
organization, set specific goals, and encourage innovation
initiatives from subordinates (Harbone & Johne, 2003;
McDonough, 2000; Sethi, 2000). Specifically, several writers
have linked transformational leadership to innovation (e.g.
Howell & Avolio, 1993).
Transformational leaders concentrate their efforts on longer-
term goals; value and emphasize developing a vision and
0019-8501/$ - see front matter D 2005 Published by Elsevier Inc.
doi:10.1016/j.indmarman.2005.09.006
* Corresponding author. School of Economics and Business, University of
Granada, Campus Cartuja, s.n., Granada 18071, Spain. Tel.: +34 958 24 23 54;
fax: +34 958 24 62 22.
E-mail addresses: jaragon@ugr.es (J..A. Arago n-Correa), victorj@ugr.es
(V.J. Garc a-Morales), ecordon@ugr.es (E. Cordo n-Pozo).
Industrial Marketing Management 36 (2007) 349 359
inspiring followers to pursue the vision; change or align
systems to accommodate their vision rather than work within
existing systems; and coach followers to take on greater
responsibility for both their own and others development
(Howell & Avolio, 1993).
Attention to the organizational influences on innovation is
also important. Although several such influences have been
analyzed, scholars are paying growing attention to the
possibility that the collective capability of organizational
learning plays a key role in determining innovation (Senge,
1990; Senge, Roberts, Ross, Smith, & Kleiner, 1994; Tushman
& Nadler, 1986). Organizational learning has been defined as a
collective capability based on experiential and cognitive
processes and involving knowledge acquisition, knowledge
sharing, and knowledge utilization (e.g., DiBella, Nevis, &
Gould, 1996; Zollo & Winter, 2002).
We propose that both collective (organizational learning)
and individual (transformational leadership) factors influence
firms to develop and implement organizational innovation.
Many previous studies, although contributing significantly to
the understanding of innovation, have not addressed how the
efficacy of innovation may vary with the simultaneous
influence of different organizational factors and have not
analyzed both direct and indirect influences (Van de Ven,
1993). Identifying and better understanding those influences
will complement the general prescription that firms should
innovate.
Additionally, the ultimate purpose of firm innovation is new
knowledge and new applications, especially those connected to
organizational improvements, and many researchers have
claimed a positive relationship between organizational learning
and performance. We sought to reinforce this work by
contributing to the analysis of the influence of innovation on
performance. Further, we sought to show how the influence of
organizational learning on performance is strengthened by the
generation of innovation.
In this article, our focus is primarily on research questions
that concern firm innovation. We first examine the nature and
strength of transformational leadership and organizational
learning as antecedents of firm innovation. We then investigate
whether firm innovation, organizational learning and transfor-
mational leadership affect financial performance. And finally,
using these research findings, we develop a model of direct and
indirect influences to guide future research in this arena and
offer managerial implications.
2. Framework and hypotheses
Capabilities require that multiple characteristics be already
embedded in a firm (Grant, 1991). Like any other capability,
organizational innovation depends on the presence of capabil-
ities by which firms synthesize and acquire knowledge
resources and generate new applications from those resources
(e.g., Calantone, Cavusgil, & Zhao, 2002; Celuch, Kasouf, &
Peruvemba, 2002). All these antecedents have to be analyzed
globally and integrated to achieve systemic thinking.
In the following sections, we present a model consisting of
five hypotheses about how transformational leadership and
organizational learning simultaneously condition firm innova-
tion. We also propose an indirect relationship between
transformational leadership and innovation through organiza-
tional learning. We recognize that other variables might be
considered in such a model; however, it was necessary to limit
our model to be able to offer empirical evidence for our
arguments, and we chose these two factors to represent a focus
on individual and on collective explanations for innovation
activity, respectively. Our aim here was simultaneous consid-
eration of these relevant antecedents of firm innovation.
Additionally, we developed two hypotheses about innovations
effect on performance. Fig. 1 illustrates the proposed model.
2.1. The influence of organizational learning on firm
innovation
Many works in the growing literature on organizational
learning have noted a positive relationship between organiza-
tional learning and firm innovation (e.g., Calantone et al.,
2002; Tushman & Nadler, 1986). Organizational learning
supports creativity (e.g., Sanchez & Mahoney, 1996), inspires
new knowledge and ideas (e.g., Damanpour, 1991; Dishman &

1
Transformational
Leadership

1
Organizational
Learning
Performance

3
Innovation
H3(+)
H2(+)
H1(+)
H4(+)
H5(+)
Fig. 1. Hypothesized model.
J.A. Aragon-Correa et al. / Industrial Marketing Management 36 (2007) 349359 350
Pearson, 2003), and increases ability to understand and apply
them (e.g., Damanpour, 1991).
Generative learning, the most advanced form of organiza-
tional learning, occurs when an organization is willing to
question long-held assumptions about its mission, customers,
capabilities, or strategy and generate changes in its practices,
strategies, and values (e.g., Argyris & Scho n, 1996; Senge,
1990). This kind of learning is a necessary underpinning for
radical innovations in products and processes (Senge et al.,
1994).
These ideas have recently begun to receive some empirical
attention. Hurley and Hult (1998) focused on a large agency of
the US federal government to show that organizational
innovativeness was positively associated with a culture that
emphasizes adaptation, innovation, and learning. Meeus,
Oerlemans, and Hage (2001) analyzed a sample of innovator
firms to show that more complex innovative activities urged
firms to coordinate and exchange information between users
and producers, which implies strong interactive learning. These
arguments lead to our first hypothesis:
Hypothesis 1. Organizational learning positively influences
firm innovation.
2.2. The influence of transformational leadership on firm
innovation
Leaders play a significant role in shaping firms potential to
generate innovations by encouraging an appropriate environ-
ment and making decisions that promote successful generation
and implementation of knowledge (Kanter, 1983; Van de Ven,
1993). The analysis of firm leaders characteristics (e.g.,
education, background, personality, or attitudes) has generated
wide attention from innovation researchers (Storey, 2000;
Tushman & Nadler, 1986).
Style of leadership has been highlighted as an especially
important influence on innovation (Harbone & Johne, 2003;
Kanter, 1983; McDonough, 2000; Sethi, 2000). Transforma-
tional leadership, which has been contrasted with Ftraditional_
or Ftransactional_ leadership, includes a wide strategic vision
about the advantages of change and adaptation (Dess & Picken,
2000), significant interest in a communicative culture (Hult,
Ferrell, Hurley, & Giunipero, 2000), attention to the develop-
ment of people (Barczak & Wilemon, 1992), and acceptance of
mistakes (Snell, 2001). It is important to highlight that
managers perceptions about their own roles in their organiza-
tions strongly influence their capability to promote this kind of
leadership in an organization.
Several features of transformational leadership are relevant
for firminnovation. Transformational leaders have an interactive
vision, paying maximum attention to effective communication
and sharing values (e.g., Adair, 1990; Quinn, 1988) and
encouraging an appropriate environment for innovative teams
(Tushman &Nadler, 1986). They support collective processes of
organizational learning (Manz, Barstein, Hostager, & Shapiro,
1989), reciprocal trust between organization members and
leaders (Scott & Bruce, 1994), and favorable attitudes toward
proactivity and risk (Lefebvre & Lefebvre, 1992). Transforma-
tional leaders perceive their role more as coordination than as
command and control (Barczak & Wilemon, 1992).
All these features together allow a better understanding of
the strong relationships between collaborative, innovative
transformational leadership and factors positively influencing
organizational innovation (e.g., Farr & Ford, 1990; Kanter,
1983). Transformational leadership is more often linked to
successful innovation than is transactional leadership (Dess &
Picken, 2000; Manz et al., 1989). These arguments lead to the
next hypothesis:
Hypothesis 2. Transformational leadership positively influ-
ences firm innovation.
Simultaneously, it is important for our work to highlight that
transformational leadership and organizational learning are also
related. This circumstance implies indirect influences on
organizational innovation, influences that have usually been
absent from previous research analysis.
Many authors have asserted relationships between leader-
ship and organizational learning (e.g., Senge, 1990; Senge et
al., 1994; Tushman & Nadler, 1986). Traditional leadership has
been characterized as highly individualistic and asystematic
and as making the learning of organizational teams difficult;
however, transformational leadership is focused on active
promotion of employees participation in collective decisions
and activities (Adair, 1990; Bass, 1991). Transformational
leaders should be able to build teams and provide them with
direction, energy, and support for processes of change and
organizational learning (Blackler & McDonald, 2000; McDo-
nough, 2000; Nadler & Tushman, 1990).
More specifically, transformational leadership fuels organi-
zational learning by promoting intellectual stimulation, inspi-
rational motivation, and self-confidence among organization
members (Coad & Berry, 1998). A capability for transforma-
tional leadership has been even described as one of the most
important means of developing learning organizations (e.g.,
Maani & Benton, 1999; Slater & Narver, 1995; Snell, 2001).
Thus, we predict:
Hypothesis 3a. Transformational leadership positively influ-
ences organizational learning.
Hypothesis 3b. Transformational leadership positively and
indirectly influences firm innovation through organizational
learning.
2.3. The influence on performance
2.3.1. Effects of organizational learning on performance
The importance of organizational learning for a companys
survival and effective performance has been highly emphasized
in the literature (e.g., Argyris & Scho n, 1996; Huber, 1991;
Senge, 1990; Zahay & Handfield, 2004). However, empirical
analysis of this relationship has been limited.
Some recent works have begun to verify this positive
relationship. Schroeder, Bates, and Junttila (2002) developed
J.A. Arago n-Correa et al. / Industrial Marketing Management 36 (2007) 349359 351
resource-based hypotheses and showed a positive relationship
between internal and external learning and organizational
performance in 164 manufacturing plants from six different
countries. Bontis, Crossan, and Hulland (2002) used respon-
dents in 32 Canadian funds to show that Fstocks of learning_ at
all organizational levels had a positive relationship with
business performance. Finally, Zahra, Ireland, and Hitt (2000)
showed a strong relationship between international diversity
and mode of market entry and the breadth, depth, and speed of
a new venture firms technological learning, especially when a
firm undertook formal knowledge integration. Thus:
Hypothesis 4. Organizational learning will be positively
associated with performance.
2.3.2. Effects of firm innovation on performance
Firm innovation has been traditionally focused on the
improvement of organizational performance (Damanpour,
1991; Zaltman et al., 1973). Some previous work has noted
that only certain characteristics of an innovation and not the
innovation itself is positively linked to organizational perfor-
mance (e.g., Danneels & Kleinschmidt, 2001; Gopalakrishnan,
2000). In any case, the vast majority of previous publications
agree that organizational innovation positively influences
performance. For illustration, we now provide some examples.
Irwin, Hoffman, and Lamont (1998) used a resource-based
view to show the positive relationship between technological
innovations and organizational performance and stated that the
innovation characteristics of rarity, value, and inimitability
moderated this relationship. Hurley and Hult (1998) demon-
strated positive relationships between organizational innova-
tion, a market orientation, and organizational learning and
showed that all these elements together influenced the potential
for good performance. Capron (1999) showed similar relation-
ships after mergers and acquisitions and, finally, Lo o f and
Heshmati (2002) showed the negative impact of avoiding
innovations. In view of the positive relationships seen in
previous research, our hypothesis is:
Hypothesis 5. Firm innovation will positively influence
performance.
3. Methodology
3.1. Sample and procedures
The sample of firms was randomly selected from the Dun
and Bradstreet 2001 database, which includes the 50,000
biggest companies operating in Spain. The final sample
contained 900 firms in four wide categories: farming,
manufacturing, construction, and services. We defined these
categories to control for confounding effects. Choosing a
sample of firms located in a relatively homogeneous geograph-
ic, cultural, legal, and political space enabled us to minimize
the impact of variables that could not be controlled (Hofstede,
1980). The Spanish market is relatively well developed, is
wholly integrated into the European Union, and has had a
slightly better rate of growth in recent years than the European
market overall. However, Spain has received relatively little
attention from organizational researchers.
Drawing on our interviews with five managers and six
academics interested in the topic and familiar with the Spanish
market, we developed a structured questionnaire to investigate
how organizations face learning and innovation issues. These
developmental interviewees did not provide data for the
empirical investigation.
We decided to use CEOs as our key informants since they
receive information from a wide range of departments and,
therefore, are a very valuable source for evaluating aspects of
organizations. They also play a major role in forming and
molding organizational characteristics by determining the types
of behavior that are expected and supported (Baer & Frese,
2003). In addition, use of CEOs meant that informants were
similar across organizations, and thus that their levels of
influence in their organizations was constant, which increased
the validity of the variables measurements (Glick, 1985).
Because the vast majority of the CEOs were native Spanish
speakers, the questionnaire was written in Spanish to avoid any
problem with the language. The questionnaires were mailed to
the CEOs of the 900 randomly selected firms along with a
cover letter. We used this method rather than interviews
because a mailed survey enabled us to reach a greater number
of firms at a lower cost, put less pressure for an immediate
response on the potential informants, and gave respondents a
greater feeling of autonomy. To reduce possible desirability
bias, we promised that we would keep all individual responses
completely confidential and confirmed that our analyses would
be restricted to an aggregated level that would prevent the
identification of any organization.
We mailed each CEO who had not yet responded three
reminders. Four hundred twenty-three CEOs finally answered
the questionnaire but, because of missing values, only 408
questionnaires were included in the research. The response rate
was 45.33%. We did not find significant differences in type of
business or number of employees between the respondents and
the sample or between early and late responders. Furthermore,
since all measures were collected with the same survey
instrument, we tested for the possibility of common method
bias using Harmans one-factor test (e.g., Scott & Bruce, 1994).
A principal components factor analysis on the questionnaire
measurement items yielded four factors with eigenvalues
greater than 1.0 that accounted for 66% of the total variance.
Since several factors, as opposed to one factor, were identified,
and since the first factor did not account for most of the
variance, common method variance did not appear to be
present (Podsakoff & Organ, 1986).
3.2. Measures
Scales are important in designing a survey instrument in
management research. As no single measure can precisely
capture behavior, researchers usually combine two or more
measures into a scale to gauge each variable. Given that
developing new scales is a complex task, wherever possible we
J.A. Aragon-Correa et al. / Industrial Marketing Management 36 (2007) 349359 352
used pretested scales from past empirical studies to ensure their
validity and reliability.
3.2.1. Transformational leadership
The strategic literature includes research that measures and
evaluates transformational leadership (e.g., Coad & Berry,
1998; Hult et al., 2000; Podsakoff, Mackenzie, & Bommer,
1996). Style of leadership is broadly based on a managers
assumption about his/her role in an organization. Therefore, we
drew five items from the scale designed by Podsakoff et al.
(1996) to assess aspects of transformational leadership. We
asked CEOs whether they gave priority to seeking new
opportunities for their organizations; tried to develop a clear
common view of final aims more than short-term objectives;
emphasized motivating the rest of the company more than
controlling; acted as the organizations leading force more than
as supervisor; and, finally, coordinated their colleagues on the
job. All the items in this paper used a Likert-type 7-point scale
(1, totally disagree to 7, totally agree). A confirmatory
factor analysis (v
5
2
=14.25, normed fit index [NFI] =0.97, non-
normed fit index [NNFI] =0.96, goodness-of-fit index
[GFI] =0.99, comparative fit index [CFI] =0.98, adjusted
goodness-of-fit index [AGFI] =0.98) subsequently verified
the scales unidimensionality and its high validity and
reliability (a =0.850).
3.2.2. Organizational learning
The capability of organizational learning has received much
more theoretical than empirical attention. Additionally, there
are wide differences among the assumptions, procedures, and
objectives of previous measures. We took measures from two
previous scales that had close conceptual links with our
research, reflected prior trends well, and had been verified in
detail. We used the first two items of Kale, Singh, and
Perlmutters (2000) scale and added two items based on
Edmondsons (1999) work. This four-item organizational
learning scale asked respondents whether, over the last 3 years,
their organizations had acquired much new and relevant
knowledge, if organizational members had acquired critical
capacities and skills, if organizational improvements had been
influenced by the entry of new knowledge, and if their
organizations were learning organizations. This scale was
similar to other recently proposed measures of external and
internal learning (e.g., Schroeder et al., 2002). We conducted a
confirmatory factor analysis to validate our scales (v
2
2
=2.40,
NFI =0.99, NNFI =0.99, GFI =0.99, CFI =0.99, AGFI =0.99).
Results showed that final scale was unidimensional and had
high reliability (a =0.919).
3.2.3. Firm innovation
Numerous researchers have analyzed organizations inno-
vation using reliable and valid scales. We based our scale on
Miller and Friesens (1983) work. We first defined firm
innovation (in contrast to industry or market innovation) for
respondents and then asked them to evaluate how high, relative
to competitors, their firms rates of new product/service
introduction and changes in internal operating practices were
for the last 3 years. A confirmatory factor analysis showed that
our scale was unidimensional and reliable (a =0.777). We also
included questions allowing the CEO respondents to offer
precise quantitative data on organizational innovation and
innovation radicality (e.g. number of new products in the last 3
years). We included questions tapping both types of assessment
in our interviews (subjective evaluation and quantitative data),
but the managers were more open to offering their perceptions
than to offering precise quantitative data (only 61 offered
quantitative data). Therefore, we tested the model using a
perceptual measure of firm innovation in which each respon-
dent rated his or her organizations innovation relative to that of
other firms in the. Where possible, we calculated the
correlation between the objective and subjective data. These
were high and statistically significant (0.76, p <0.01).
3.2.4. Performance
Having reviewed how performance was measured in
different works of strategic research (e.g., Venkatraman &
Ramanujan, 1986), we drew up an eight-item scale to measure
organizational performance. The CEOs were asked to evaluate
their firms performance for the last 3 years, measured as return
on assets, return on internal resources, and sales growth in their
main products or services and markets. They were also asked to
compare these measures with their principal competitors
performance, noting which were above the mean. The use of
scales evaluating performance in comparison with main
competitors is one of the practices most widely used in recent
studies to provide an objective reference for sampled managers
(Steensman & Corley, 2000).
Many researchers have used managers subjective percep-
tions to measure beneficial outcomes for firms. Others have
preferred objective data, such as return on assets. Scholars have
widely established that there is a high correlation and
concurrent validity between objective and subjective data on
performance, which implies that both are valid when calculat-
ing a firms performance (e.g., Dess & Robinson, 1984;
Venkatraman & Ramanujan, 1986). We included questions
involving both types of assessment in our interviews, but the
managers were more open to offering their general views than
to offering precise quantitative data; therefore, we tested the
model using a perceptual measure of financial performance
(three items, seven-point scale). When possible, we calculated
the correlation between objective and subjective data, and these
were high and significant. A confirmatory factor analysis
(v
20
2
=285.95, NFI =0.92, NNFI =0.90, GFI =0.96, CFI =0.93,
AGFI =0.92) showed that the scale was unidimensional and
highly reliable (a =0.889).
3.2.5. Control variables
Size may affect an organizations ability to learn (DiBella et
al., 1996; Tsang, 1997) or to innovate (Damanpour, 1992;
Vossen, 1998). The size indicators initially used for this
research were firm income and number of employees.
Information for these variables was gathered through the
survey and validated using Dun and Bradstreet; correlation
coefficients between these sources were strong and significant.
J.A. Arago n-Correa et al. / Industrial Marketing Management 36 (2007) 349359 353
In addition, because size and income were highly correlated,
we used number of employees only in our model (Weaver,
Trevino, & Cochran, 1999).
Major industry type was measured at the two-digit SIC code
level and then aggregated to four wide categories, as described
under Sample and procedures above. This variable controls the
potential influence of industry on learning (Li, 1995) and
profitability. The survey asked managers to name the industry
from which the company generated most of its sales.
3.3. Model and analysis
The LISREL 8.30 program was used to test the theoretical
model. Fig. 1 shows the basis of the model proposed, together
with the hypotheses to be tested. We used a recursive
nonsaturated model, taking transformational leadership (n
1
)
as the exogenous latent variable, organizational learning (g
1
) as
a first-grade endogenous latent variable, and innovation (g
2
)
and organizational performance (g
3
) as second-grade endoge-
nous latent variables. Through flexible interplay between
theory and data, this structural equation model approach
bridges theoretical and empirical knowledge to allow a better
understanding of the real world. Such analysis allows for
modeling based on both latent and manifest variables, a
property well suited to the hypothesized model, where most
of the represented constructs are abstractions of unobservable
phenomena. Further, structural equation modeling takes into
account errors in measurement, variables with multiple
indicators, and multiple-group comparisons.
4. Analysis and results
In this section we present the main research results. First,
Table 1 shows the means and standard deviations as well as the
interfactor correlation matrix for the study variables. There are
significant and positive correlations among transformational
Table 1
Means, standard deviations and correlation
Variable Mean S.D. 1 2 3 4 5
1. Transformational Leadership 5.22 0.94 1.000
2. Organizational Learning 5.37 1.14 0.473*** 1.000
3. Innovation 4.67 1.19 0.387*** 0.587*** 1.000
4. Performance 4.83 1.02 0.456*** 0.488*** 0.509*** 1.000
5. Size 3.4 1.68 0.068 0.010 0.071 0.009 1.000
*** Significant at p <0.001 (two-tailed); n =408.fs

1
Transformational
Leadership

1
Organizational
Learning

2
Innovation

3
Performance
PERFOR1

8
PERFOR2

9
PERFOR3

10
PERFOR4

11
PERFOR5

12
PERFOR6

13
PERFOR7

14
PERFOR8

15
OL1

1
OL2

2
OL3

3
OL4

4
INNOVA1

5
INNOVA2

6
INNOVA3

7
LEADER1
1
LEADER2
2
LEADER3
3
LEADER4
4
LEADER5
5

x
11
=.73

x
12
=.87

x
13
=.81

x
15
=.81

y
11
=.94

y
12
=.92

y
13
=.86

y
14
=.86

y
25
=.73

y
26
=.75

y
27
=.87

y
39
=.96

y
310
=.91

y
311
=.86

y
312
=.93

y
313
=.97

y
314
=.88

y
315
=.94

y
38
=.94

x
14
=.78

11
= .81***

21
= .37***

21
= .56***

31
= .24**

32
= .73***

p < 0.1; * p < 0.05; ** p < 0.01; *** p < 0.001 (two-tailed).
Fig. 2. Results of structural equation model.
J.A. Aragon-Correa et al. / Industrial Marketing Management 36 (2007) 349359 354
leadership, organizational learning, innovation and perfor-
mance. A series of tests (e.g., tolerance, and variance inflation
factor) showed the absence of multicolinearity (Hair, Ander-
son, Tatham, & Black, 1999). We performed structural
equation modeling (Bollen, 1989) to estimate direct and
indirect effects, using LISREL and using the correlation matrix
and asymptotic covariance matrix as input. This type of
analysis has the advantage of correcting for unreliability of
measures and also gives information on the direct and indirect
paths between multiple constructs after potentially confounding
variables are controlled for. Fig. 2 shows the standardized
structural coefficients. This diagram shows only paths that are
significant at the 0.5 level. The magnitude of the coefficients of
the variables reflects their relative importance.
With respect to the quality of the measurement model for the
sample, the constructs display satisfactory reliability, as
indicated by composite reliabilities ranging from 0.78 to 0.92
and shared variance coefficients ranging from 0.62 to 0.85
(Table 2). Convergent validitythe extent to which maximally
different attempts to measure the same concept agreecan be
judged by looking at both the significance of factor loadings
and shared variance. The amount of variance shared or
captured by a construct should be greater than the amount of
measurement error (shared variance >0.50). All the multi-item
constructs meet this criterion, each loading (k) being signifi-
cantly related to its underlying factor (t-values greater than
28.29). Likewise, a series of chi-square difference tests on the
factor correlations showed that discriminant validitythe
degree to which a construct differs from othersis achieved
among all constructs (Anderson & Gerbing, 1988). In
particular, we established discriminant validity between each
pair of latent variables by constraining the estimated correlation
parameter between them to 1.0 and then performing a chi-
square difference test on the values obtained for the constrained
and unconstrained models (see Anderson & Gerbing, 1988).
The resulting significant differences in chi-square indicate that
the constructs are not perfectly correlated and that discriminate
validity is achieved.
The overall fit measures, the multiple squared correlation
coefficients of the variables, and the signs and significance
levels of the path coefficients all indicate that the model fits the
data well (v
165
2
=0.34, p <0.001; NFI =0.93; NNFI =0.93;
GFI =95; CFI =0.94; AGFI =0.94). The hypothesized model
was a significantly better fit than the null model (v
190
2
=
14953.36, p <0.001; Dv
25
2
=13939.02, p <0.001). All of the
modification indices for the beta pathways between major
variables were small, suggesting that adding additional paths
would not significantly improve the fit. The residuals of the
covariances were also small and centred around zero.
If we look at the standardized parameter estimates, the
findings show that innovation is affected by organizational
learning (b
21
=0.56, p <0.001), supporting Hypothesis 1. As
mentioned previously, much earlier research has demonstrated
this relation. As predicted in Hypothesis 2, innovation appears
to be also influenced strongly by transformational leadership
(c
21
=0.37, p <0.001). Our research shows that innovation is
strongly affected by transformational leadership and organiza-
tional learning (R
2
=0.78).
The results also show that transformational leadership is
highly related (R
2
=0.65) to and affects organizational learning
(c
11
=0.81, p <0.001). Thus, as predicted in Hypotheses 3a and
3b, one of the essential characteristics that firms must consider
in analyzing organizational learning is transformational lead-
ership. A transformational leadership style improves the
development of learning within an organization. Furthermore,
we observe an indirect effect (0.45, p <0.001) of transforma-
tional leadership on innovation through organizational learning
(0.810.56; see, for instance, Bollen, 1989, for calculation
rules). The global influence of transformational leadership on
innovation is thus 0.82 ( p <0.001). Comparing the magnitudes
of these effects indicates that the direct effect of transforma-
tional leadership on organizational learning is significantly
larger than the direct effect of transformational leadership on
innovation.
Finally, Hypotheses 4 and 5 relate organizational learning
and innovation to organizational performance (R
2
=0.89).
Hypothesis 4 holds because the parameter estimates verify a
positive and statistically significant association between
organizational learning and performance, both directly
(b
31
=0.24, p <0.01) and indirectly, via innovation (0.41,
p <0.001). The total effect (direct and indirect) of organiza-
tional learning on performance is 0.65 ( p <0.001). The
positive, significant relationship between innovation and
performance (b
32
=0.73, p <0.001) supports Hypothesis 5. Of
these two variables (organizational learning and innovation),
innovation shows the greatest influence on organizational
performance. In addition to these effects, we observe an
Table 2
Validity, reliability and internal consistency
Variable Item Parameter Validity, reliability and
internal consistency
k* R
2
A.M.
Transformational
Leadership
LEADER1 k
x
11
0.73 (f.p.) 0.53 a =0.850
C.R. =0.899
S.V. =0.642
LEADER2 k
x
12
0.87*** 0.76
LEADER3 k
x
13
0.81*** (32.60) 0.65
LEADER4 k
x
14
0.78*** (30.07) 0.61
LEADER5 k
x
15
0.81*** (30.37) 0.66
Organizational
Learning
OL1 k
11
0.94 (f.p.) 0.88 a =0.919
C.R. =0.941
S.V. =0.800
OL2 k
12
0.92*** (67.04) 0.84
OL3 k
y
13
0.86*** (60.53) 0.74
OL4 k
y
14
0.86*** (44.93) 0.74
Innovation INNOVA1 k
y
25
0.73 (f.p.) 0.53 a =0.777
C.R. =0.827
S.V. =0.616
INNOVA2 k
y
26
0.75*** (28.29) 0.56
INNOVA3 k
y
27
0.87*** (31.18) 0.76
Performance PERFOR1 k
y
38
0.94 (f.p.) 0.87 a =0.889
C.R. =0.978
S.V. =0.853
PERFOR2 k
y
39
0.96*** (70.13) 0.91
PERFOR3 k
y
310
0.91*** (55.33) 0.83
PERFOR4 k
y
311
0.86*** (59.09) 0.74
PERFOR5 k
y
312
0.93*** (68.24) 0.87
PERFOR6 k
y
313
0.97*** (70.06) 0.94
PERFOR7 k
y
314
0.88*** (63.71) 0.78
PERFOR8 k
y
315
0.94*** (66.86) 0.88
k*=standardized structural coefficient; R
2
=reliability; a =alpha Cronbach;
C.R. =compound reliability; S.V. =shared variance; f.p. =fixed parameter;
A.M. =adjustment measurement.
*** Significance at p <0.001 (two-tailed).
J.A. Arago n-Correa et al. / Industrial Marketing Management 36 (2007) 349359 355
indirect effect (0.79, p <0.001) of transformational leadership
on performance via organizational learning (0.19, p <001),
innovation (0.27, p <0.001), and organizational learning-
innovation (0.33, p <0.001). The control variables do not show
significant influence for the sampled firms (Table 3).
In testing the theoretical framework, we fit several nested
models, each incorporating different assumptions about para-
meters. Comparisons with reasonable alternative models are
recommended as a means of showing that a hypothesized
model is the best representation of the data. Comparison is
considered to be an important part of assessing model fit
(Kelloway, 1995). The summary statistics in Table 4 indicate
that Model 1 is preferred to the others, supporting the inclusion
of a model with these relationships among the analyzed
constructs. For example, if we compare the theoretical model
(Model 1) with a model that does not consider the relationship
between innovation and performance (Model 6), we can see
that the latter has poorer values on the expected cross-
validation index (DECVI =0.15), Akaike information criterion
(DAIC=53.62), and estimated noncentrality parameter
(DNCP=54.62). Hence, results show that innovation affects
performance and that Model 1 is preferable to Model 6
(Dv
2
=55.62, Ddf =1). Likewise, we see that the theoretical
model is preferable to the remaining models formulated (Table
4). Length restrictions prevent a detailed discussion of each
model, but a whole report is available from the authors. In sum,
the proposed theoretical model represented (Fig. 2) the
preferred, most acceptable, and most parsimonious model.
5. Discussion
Firms need innovation to improve their performance in real-
life changing business environments. Our work contributes to
such performance improvement by showing that organizational
innovation is based on multiple and simultaneous influences of
individual and collective features. Specifically, results support
all our hypotheses, showing that in our sampled firms, a
management style of transformational leadership and the
collective capability of organizational learning both simulta-
neously influence innovation.
The collective capability of organizational learning has a
stronger direct influence on firm innovation for our sample than
the transformational leadership of the CEO; however, leadership
shows a very high and significant influence on organizational
learning, indirectly affecting firm innovation. Additionally,
our results show a positive and significant influence of
innovation on performance. Organizational learning also posi-
tively affects performance, but especially does so through firm
innovation.
A major implication of this work for practitioners and
scholars is that innovation is not directly available to all
organizations at all times, but only to firms with the appropriate
internal characteristics. Wide prescriptions for innovation have
often created serious problems for managers in terms of
inappropriate processes for generating real innovation. Those
problems are not a limitation of innovation in itself, but the
consequence of limited understanding of the complex condi-
tions that are necessary for successful innovation.
Huge resources may not be enough (or even may not be
needed) to achieve innovation. Transformational leadership and
the capability of organizational learning are relevant examples
of the internal conditions that firms need to have in order to
innovate. We discuss below some other implications of our
results for the relationships between the analyzed character-
istics and firm innovation and consequences of the influence of
firm innovation on performance.
Our research supports the theoretical arguments offered in
previous literature about the existence of a positive relationship
between organizational learning and firm innovation (e.g.,
Argyris & Scho n, 1996; Dishman & Pearson, 2003; Senge et al.,
1994; Zahay & Handfield, 2004). On the other hand, our results
also support the importance of transformational leadership in
Table 3
Parameter and relationship
Parameter and relationship k*
Direct Effects
g
11
Transformational LeadershipYOrganizational Learning 0.81*** (25.43)
g
21
Transformational LeadershipYInnovation 0.37*** (4.67)
h
21
Organizational LearningYInnovation 0.56*** (7.34)
h
31
Organizational LearningYPerformance 0.24** (3.04)
h
32
InnovationYPerformance 0.73*** (9.11)
Indirect Effects
Transformational LeadershipYInnovation 0.45*** (7.48)
Transformational LeadershipYPerformance 0.79*** (25.38)
Organizational LearningYPerformance 0.41*** (5.27)
Total Effects
Transformational LeadershipYInnovation 0.82*** (21.13)
Transformational LeadershipYPerformance 0.79*** (25.38)
Organizational LearningYPerformance 0.65*** (11.15)
k*=standardized structural coefficient.
.
Significance at p <0.1; ***Significance at p <0.001 (two-tailed).
Table 4
Parameter, relationship and goodness of fit statistics
Model Description v
2
df Dv
2
NFI NNFI GFI CFI AGFI ECVI AIC PGFI NCP
1 Theoretical 1014.34 165 0.93 0.93 0.95 0.94 0.94 2.98 1104.34 0.75 849.34
2 W.R. Transformational LeadershipYOrganizational Learning 1014.34 165 0.93 0.93 0.95 0.94 0.94 2.98 1104.34 0.75 849.34
3 W.R. Transformational LeadershipYInnovation 1033.67 166 19.33 0.93 0.93 0.95 0.94 0.94 3.03 1121.67 0.75 867.67
4 W.R. Organizational LearningYInnovation 1039.26 166 24.92 0.93 0.93 0.95 0.94 0.94 3.05 1127.26 0.75 873.26
5 W.R. Organizational LearningYPerformance 1019.83 166 5.49 0.93 0.93 0.95 0.94 0.94 2.99 1107.83 0.75 853.83
6 W.R. InnovationYPerformance 1069.96 166 55.62 0.93 0.95 0.95 0.94 0.94 3.13 1157.96 0.75 903.96
W.R. =without relationship. n =408.
J.A. Aragon-Correa et al. / Industrial Marketing Management 36 (2007) 349359 356
generating innovation (e.g., Dess & Picken, 2000; Hult et al.,
2000; McDonough, 2000; Sethi, 2000). This result is especially
appealing because it supports the characterization of transfor-
mational leadership as more concerned with collective deci-
sions, collective goals, and the generation of capabilities than is
traditional leadership, which focuses more on top-down
decisions, standardized procedures, and the production of
products and services.
Therefore, a common perspective integrating and motivating
organizational members is a prerequisite for firm innovation. A
CEOs willingness to accept risks and mistakes is also probably
one of the first steps of the process of innovation. Additionally,
transformational leadership has shown its potential to help
organization members create and use knowledge (e.g., Senge et
al., 1994; Snell, 2001). Transformational leadership contributes
to a good internal environment for collaboration and work
among team members. Further, one of its main outputs should
be the absorption of ideas promoting organizational learning
and therefore promoting a transformational leaderships indirect
influence on firm innovation through organizational learning.
Finally, the results of this study also shed additional light on
innovations positive implications for firm performance. These
results support previous literature stating such positive effects
of innovation (e.g., Damanpour, 1991; Irwin et al., 1998). Our
results show some additional and appealing aspects of the
indirect relationships among organizational learning, firm
innovation, and performance. First, organizational learning
not only directly influences both performance and innovation,
but also influences performance through innovation. Second, in
our sample the relationship between organizational learning
and firm innovation was even stronger than that between
organizational learning and performance. We want to avoid a
definitive assessment about the sense of the analyzed relation-
ships between organizational learning, firm innovation, and
performance. As discussed below, future longitudinal works
should help to complete these findings.
6. Managerial implications
Our research shows the importance of transformational
leadership for improving financial performance and thus
promoting firm innovation and organizational learning. Tradi-
tional relationships between leadership and managers should
then be reviewed. It is especially important here to understand
the importance and peculiarities of transformational leadership.
First, transformational leadership includes very special atten-
tion to the development of the people in a firm. Human
resources are the most important assets for these leaders.
Transformational leaders concentrate their efforts on value
and emphasize developing a vision and inspiring followers to
pursue the vision; they change or align systems to accommo-
date their vision rather than work within existing systems; and
they coach followers to take on greater responsibility for both
their own and others development.
Secondly, style of leadership is broadly based on a
managers assumption about his/her role in an organization.
It is highly important that the transformational leader act in a
way that is coherent with his/her statements. Transformational
leaders have to offer all their resources to avoid any skeptical
behavior in the firm (Wick & Leo n, 1995). His/her own
compromise with the abilities of learning plays a key role in
promoting a culture of shared knowledge in the firm.
Thirdly, our work shows the importance of transforming all
these attitudes into organizational routines. Leaders play a
significant role in shaping firms potential to generate innova-
tions by encouraging an appropriate environment and making
decisions that promote successful generation and implementa-
tion of knowledge. Innovation especially needs the collective
effort of organizational learning, and it has to be based on
collective and continuous employees efforts to share and
generate new knowledge more than on individual intentions.
All these features together allow a better understanding of the
strong relationships between collaborative transformational
leadership and factors positively influencing organizational
innovation and learning.
7. Conclusions, limitations, and future directions
This study (1) analyzes the simultaneous influence on firm
innovation of transformational leadership and organizational
learning; (2) shows that although both directly influence
innovation, the collective process of organizational learning
has a stronger direct influence on innovation for our sample than
transformational leadership; (3) however, also shows that
leadership has a strong and significant influence on organiza-
tional learning; and (4) emphasizes the positive and significant
influence of firm innovation on performance. Our research
demonstrates the importance of an integrated analysis of direct
and indirect effects of individual and organizational determi-
nants of firminnovation and reinforces previous literature on the
importance of organizational innovation for organizational
performance.
Our results must be only cautiously generalized because this
study has several limitations that suggest further possibilities
for empirical research. First, survey data based on self-reports
may be subject to social desirability bias (Podsakoff & Organ,
1986). However, an assurance of anonymity can reduce such
bias even when responses concern sensitive topics (Hair et al.,
1999). The low risk of social desirability bias in this study was,
however, indicated by the comments of several managers who
noted that it made no sense for their companies to go beyond
regulatory compliance in the innovation arena. Further, we
tested the possibility of common method bias using Harmans
one-factor test, and none appeared to be present (Podsakoff &
Organ, 1986; Scott & Bruce, 1994).
Secondly, the study is limited by its cross-sectional design.
Although we tested the most plausible directions for the
pathways in our model, longitudinal research is needed to
assess the direction of causality of the relationships and to
detect possible reciprocal processes. We have tried to temper
this limitation through attention to theoretical arguments
rationalizing the analyzed relationships (Hair et al., 1999)
and through integrating temporal considerations into measure-
ment of the variables. Finally, our results must be cautiously
J.A. Arago n-Correa et al. / Industrial Marketing Management 36 (2007) 349359 357
analyzed in view of the geographical and business peculiarities
of our sample.
Future research should pay more attention to the influence
of different mixtures of influences on organizational innova-
tion. It should be noted that selected variables explain an
acceptable amount of variance of organizational innovation and
performance. In any case, others could be analyzed, such as
shared vision, teamwork, absorptive capacity, and technology.
We might also examine other consequences of introducing an
organizational innovation in firms (e.g., quality improvement,
staff satisfaction, and improvements in relational capacity). The
homogeneous geographical context examined here limits the
influence of external conditions, but future research might well
explicitly integrate the influences of external factors (Aragon-
Correa & Sharma, 2003). More empirical papers supporting (or
rejecting) our results in different contexts would be welcomed,
especially longitudinal studies.
Acknowledgement
We would like to thank Peter J. LaPlaca and the anonymous
reviewers for extremely helpful comments. We would also like
to thank the European Commission-Spanish Ministry of
Science and Research (project SEC 2003-07755) and the
Foundation BBVA for their financial support.
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Juan Alberto Arago n-Correa is Chairman of the Department of Management
at the University of Granada (Spain) and visiting professor at the Rotterdam
Management School (the Netherlands). He received his PhD from the
University of Seville and completed a postdoctoral fellowship at the Saint
Marys University (Canada). His primary research interests include corporate
environmental strategies, firm innovation and dynamic capabilities. He has
published in multiple journals such as Academy of Management Journal,
Academy of Management Review, or Journal of Business Research.
V ctor J. Garc a-Morales is an assistant professor at the University of
Granada (Spain). He received his PhD from the University of Granada and his
primary research interests include the organizational capabilities of knowledge
management and organizational learning. He has published in multiple journals
such as International Journal of Technology Management, International
Journal of Service Industry Management or Revista Europea de Direccio n y
Econom a de la Empresa.
Eulogio Cordo n-Pozo (ecordon@ugr.es) is an assistant professor and
coordinator of the Department of Management at the University of Granada
(Spain). He received his PhD from the University of Granada and his primary
research interests include product innovation and high technology activities. He
has published in multiple journals such as Technology Analysis and Strategic
Management, International Journal of Technology Management, Revista
Europea de Direccion y Econom a de la Empresa, or Economia Industrial.
J.A. Arago n-Correa et al. / Industrial Marketing Management 36 (2007) 349359 359