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The purpose of this paper is to explore the role of mediation and moderation mechanisms between firm-level effects of transformational leadership (TFL) on unit-level performance across levels.

The authors used surveys to collect data from 800 senior managers at the firm level and 1,377 unit managers from 800 units of 100 firms from semiconductors, optoelectronics, computer electronics, and telecommunications industries. The industries were chosen because these firms focus on expanding their businesses and encourage extensive knowledge sharing among the firms and at all levels within the organizations.

In this study, the authors theorized that firm-level effects of TFL on unit-level performance across levels were positively related to unit-level performance. Unit-level knowledge sharing mediates the positive relationship between firm-level TFL and unit-level performance. A cross-level interaction effect of firm-level TFL and unit-level absorptive capacity showed that a positive unit-level absorptive capacity enhanced firm-level influence of TFL on unit-level knowledge sharing. Unit-level absorptive capacity moderates the positive relationship between unit-level knowledge sharing and unit-level performance.

First, the authors attempt to integrate the leadership and knowledge management research by exploring the critical mediator of unit-level knowledge sharing in explaining the effects of firm-level TFL on employees’ performance at the unit level. This approach is important because it extends the research areas of the two fields, and also clarifies issues regarding how and why TFL at the top of the organization positively impacts the performance of employees at a lower level of the organizational hierarchy. Second, the effectiveness of firm-level TFL depends on the absorptive capacity of each unit. The importance of absorptive capacity and the consequences of leadership behaviors have been emphasized in studies.