Following the process-based definition of absorptive capacity, this study seeks to explore the mediating role of transformational and transactional leadership styles in the relationship between the three learning processes of absorptive capacity and innovation. Based on a survey in the United Arab Emirates (UAE), it was found that transformational leadership mediates the relationship between exploratory and transformational learning processes and innovation. It was also found that transactional leadership did not mediate the relationship between the internal exploitative learning process and innovation. While several researchers have noted a need to develop a better theoretical understanding of the mechanisms explaining the interplay between absorptive capacity and innovation, we provide theoretical explanations of the underlying mechanism and further offer explanations as to why some firms are better able to convert external knowledge into strategic innovations when compared with others. The implications of these findings for theory and practice are delineated.

Absorptive capacity (AC), which comprises exploratory, transformative, and exploitative learning processes, enables organizations to exploit external knowledge for adopting innovation. Despite extensive research into AC, leadership styles have received little attention. This paper discusses the results of a study undertaken in three pharmaceutical organizations that augments AC theory relating to top‐ and middle‐level management behaviour. The findings suggest that the influence of transformational and transactional leadership styles varies between the AC learning processes within and across organizations. We also explored CEOs' knowledge, trust in middle management, and intention towards sharing knowledge, which facilitate the learning processes. The research has implications for the enhancement of opportunities to enable successful innovations based on the recognition of leadership styles and managers' roles. We report several novel contributions that are of value to academics and practitioners.

This paper investigates the impact of transformational and transactional leadership on the absorptive capacity of firms within an emerging market setting. Unlike some findings from the Western world, the results indicate that both transformational and transactional leadership styles positively influence the learning processes of absorptive capacity. More specifically, the results indicate that transactional leadership style positively influences the exploratory and transformative learning processes, while the transformational leadership style positively affects the exploitative learning process. Given the unique context under investigation and the fluid institutional arrangements associated with it, the results reflect the need for leadership guidance. Implications for theory and practice are discussed.