Unlocking Employees' Innovative Work Behavior in Punjab's Smes: The Roles of Innovative Capacity and Psychological Empowerment, and the Moderating Effect of Knowledge-Sharing Behavior

Purpose: Small and medium-sized enterprises (SMEs) are central to Pakistan’s economy, yet most fail within a few years of start-up, and weak innovation is widely cited as a contributing factor. This study examines how firm-level innovative capacity (IC) and employees’ psychological empowerment (PE) shape innovative work behavior (IWB), and whether knowledge-sharing behavior (KSB) strengthens these relationships. Design/methodology/approach: Grounded in Social Exchange Theory and the Knowledge-Based View, a cross-sectional survey was administered to middle-level managers in six SME industries (garments and textile, leather and shoes, sports, wood and furniture, hospitality, and agro-processing) across six Punjab cities (Lahore, Faisalabad, Gujranwala, Sialkot, Gujrat, and Multan). A stratified cluster sampling design was used; 695 questionnaires were distributed, 343 were returned, and 308 were usable (44.32%). Hypotheses were tested with partial least squares structural equation modeling (PLS-SEM) in SmartPLS, with perceived organizational justice retained as a control variable. Findings: The measurement model met conventional reliability and validity thresholds, with some caveats noted in the text. IC, PE, and KSB each had a significant positive effect on IWB. KSB positively moderated the IC–IWB and the PE–IWB relationships. The simple-slope pattern indicates that empowerment translated into innovative behavior mainly where knowledge sharing was high. Originality/value: The study links an organization-level capability (IC) with an individual-level psychological state (PE) in explaining employee-level innovation, and it treats knowledge sharing as a boundary condition rather than a mediator. It provides multi-industry, multi-city evidence from an under-researched SME context in a developing economy. Practical implications: SME owners and policymakers should pair investments in innovative capacity and employee empowerment with deliberate, low-cost mechanisms for knowledge exchange, such as peer mentoring, cross-functional teams, and communities of practice.