The purpose of this paper that determine whether the intellectual stimulation can influence innovation which is mediated by knowledge sharing, and whether innovation can improve a firm's performance . The model tested on the 56 owners of small and medium enterprises (SMEs) in Tegal, Indonesia. Utilizing purposive sampling technique, with the follwing criteria, company has a workforce 5 to 100 people, engaged in the metal and machinery industry, not including to foreign-owned companies. Software

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... analysis techniques PLS (Partial Least Square) are used in this research. The final results indicate that there are positive effects on intellectual stimulation, experiential sharing and explicit knowledge sharing; explicit knowledge sharing has a positive effect on product innovation and product innovation has a positive effect on business performance. While experiential sharing has a positive effect on product innovation, it is not significant, so the hypothesis is rejected. This study has important managerial implications, the psychological barriers that prevent employees sharing knowldge and experience can be enhanced through intellectual stimulation of transformational leaders, in this case the leader to be a role model that can be replicated and duplicated by subordinates or employees.