The Effect of Performance-Based Budgeting Systems on Green Innovation Outputs in Private Industrial Firms: The Mediating Role of Digital Transformation and the Moderating Effect of Transformational Leadership

This study investigates the impact of Program and Performance Budgeting (PPB) systems on green innovation outcomes in the Iraqi private industrial sector by examining the mediating role of digital transformation and the dual moderating effect of transformational leadership. A quantitative cross-sectional design was employed using a stratified random sample of 520 respondents from 45 Iraqi private industrial firms across five industrial sectors. The data were analyzed using Partial Least Squares Structural Equation Modeling (PLS-SEM) with 5,000 bootstrap resamples, along with conditional effects analysis at three levels of transformational leadership. The findings demonstrate that Program and Performance Budgeting has a positive and statistically significant direct effect on green innovation (β = 0.431, p < 0.001) and an even stronger positive effect on digital transformation (β = 0.773, p < 0.001), representing the strongest relationship in the model. Digital transformation also partially mediates the relationship between Program and Performance Budgeting and green innovation (β = 0.201, p < 0.001), indicating that Program and Performance Budgeting promotes green innovation through two distinct pathways: a direct pathway via incentives and accountability mechanisms, and an indirect pathway through the enhancement of digital capabilities. In contrast, the results reveal that transformational leadership does not significantly moderate the direct relationship between Program and Performance Budgeting and green innovation (H5: β = −0.001, p = 0.966). However, it significantly and negatively moderates the relationship between Program and Performance Budgeting and digital transformation (H6: β = −0.029, p = 0.029), suggesting a substitution effect, whereby strong transformational leadership bypasses the budgeting mechanism and independently stimulates digital transformation. Similarly, the index of moderated mediation was statistically significant but negative (H7: β = −0.009, p = 0.033), further supporting the substitution phenomenon in which strong transformational leadership independently drives digital transformation beyond the influence of the budgeting system. The structural model explained 72.4% of the variance in digital transformation and 28.3% of the variance in green innovation. This study presents the first integrated structural model that examines Program and Performance Budgeting as a driver of green innovation in the Iraqi industrial context. By integrating Contingency Theory and Resource Dependence Theory, it reveals an unexpected leadership pattern that reframes the role of transformational leadership in sustainability models within emerging economies.