This study proposes a model of the impact of transformational leadership both on followers' creativity at the individual level and on innovation at the organizational level. The model is tested on 163 R&D personnel and managers at 43 micro- and small-sized Turkish software development companies. The results suggest that transformational leadership has important effects on creativity at both the individual and organizational levels. At the individual level, the results of hierarchical linear modeling show that there is a positive relationship between transformational leadership and employees' creativity. In addition, transformational leadership influences employees' creativity through psychological empowerment. At the organizational level, the results of regression analysis reveal that transformational leadership positively associates with organizational innovation, which is measured with a market-oriented criterion developed specifically for developing countries and newly developing industries. The implications of the findings along with some potential practical applications are discussed. (c) 2008 Elsevier Inc. All rights reserved.