International Journal of Economics, Commerce and Management United Kingdom Vol. V, Issue 11, November 2017 Licensed under Creative Common Page 747 http://ijecm.co.uk/ ISSN 2348 0386 EFFECT OF TRANSFORMATIONAL AND TRANSACTIONAL LEADERSHIP ON INNOVATION PERFORMANCE AMONG SMALL AND MEDIUM ENTERPRISE IN UASIN GISHU COUNTY, KENYA Jane Sang Moi University, Kenya cjsang@yahoo.com Abstract The main purpose of the study was to determine effect of Transformational and Transactional leadership on SME innovation performance. The study was informed upper echelons theoretical perspective. Explanatory research design was employed while questionnaire was used to collect data from a sample size of 290 SMEs which was randomly selected. Findings from multiple regression model indicated that both hypothesis were rejected at 0.05 level of significance. This infers that transformational leadership and transactional leadership had significant and positive effect on SME innovation. In addition, results showed that all the two predictors (transformational and transactional leadership) explained 57.2 percent variation of SME innovation. Thus, transformational leadership and transactional leadership make it possible for SMEs to highly innovation achieve competitive advantage. It is therefore important for SMEs managers to focus on understanding a transformational leadership and transactional leadership. Keywords: Transformational leadership, transactional leadership, SME innovation, strategic leadership INTRODUCTION Innovation is one of the key components for SME effectiveness and innovative firms are capable of creating or finding new ways of developing the edge needed for sustainability (Janssen, Van de Vliert, & West, 2004; Yuan & Woodman, 2010). The knowledge embedded in human capital enables firms to enhance distinctive competencies and discover innovation opportunities (Wright et al., 2001). When SME develop new products and improve management