Transformational leadership dimensions impact on sustainable performance of manufacturing SMEs in developing countries: Environmental performance as a mediator

Sustainable development has emerged as a strategic priority globally, with environmental responsibility increasingly linked to business competitiveness. For manufacturing small and medium-sized enterprises (SMEs), aligning economic and environmental objectives is essential for long-term viability. Grounded in the Resource-Based View (RBV), this study examines how transformational leadership (TL) dimensions—Charisma, Inspirational Motivation, Intellectual Stimulation, and Individualized Consideration—affect both Environmental Performance (EP) and Economic Performance (ECONP), and explores EP’s mediating role in these relationships. Survey data from 199 SME owners and managers in Yemen were analyzed using partial least squares structural equation modeling (PLS-SEM) via SmartPLS. The results reveal that TL dimensions exert differentiated effects on EP and ECONP, with EP significantly mediating these pathways. These findings underscore the contextual nature of leadership’s impact on sustainable performance and highlight the strategic value of environmental initiatives in enhancing profitability. The study offers actionable insights for SME leaders and policymakers, advocating for context-sensitive leadership practices and targeted policy interventions to strengthen SMEs’ contributions to sustainable development.