<![CDATA[Background: The MSME sector frequently faces performance stagnation due to centralized leadership styles. Previous research has not comprehensively dissected the role of employee engagement within vulnerable MSME ecosystems. Purpose: To analyze the effect of transformational leadership and psychological empowerment on MSME employee performance, and to test the mediating role of employee engagement. Methods: This quantitative correlational study involved a sample of 120 MSME employees (purposive sampling). Data analysis was conducted using the PLS-SEM approach with SmartPLS. Results: Transformational leadership has no significant effect on performance and failed to be mediated by employee engagement. Conversely, psychological empowerment is proven to improve performance, both directly and through the mediation of employee engagement. Conclusion: Psychological empowerment is a dominant predictor in improving MSME employee performance. Employee engagement proves essential in bridging the feeling of empowerment into tangible achievements, suggesting that MSMEs need to focus more on empowerment rather than mere command-style leadership.]]>
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