The inovation capability of a firm depends on knowledge resources. Knowledge sharing is an important part in knowledge management to optimize firm knowledge resources. However, knowledge sharing can not be automatically achieved. Leadership factor is an important factor to encourage knowledge sharing. The purpose of this study was to examine the role of transformational and transactional leadership of the owners of SMEs to encourage knowledge sharing activity which in turn this activity can enhance innovation capability. The survey was conducted in the SME production sector in North Sulawesi Province, Indonesia. The research involved 176 samples. Data were analyzed with Structural Equation Model based on PLS-SEM variant. The result showed that only transformational leadership had a positive effect to encourage knowledge sharing. Further, the result showed that knowledge donating had the positive effect to enhance innovation capability. Surprisingly, the result showed that knowledge collecting had a negative effect to innovation capability.