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This paper aims to investigate the effects of transformational leadership on individuals and organization’s innovation capability via the mediating role of employees' positive psychological capital (Psy-Cap) namely self-efficacy and optimism.

Structural equation modeling (SEM) is used to test proposal hypotheses through the empirical data collected from 330 participants at 90 firms in Vietnam.

The research findings revealed that self-efficacy and optimism significantly mediate the relationship between transformational leadership and innovation capabilities. In addition, self-efficacy has a greater impact on innovation capabilities compared with the effect of optimism.

The findings highlight the important role of practicing transformational leadership style to nurture and foster both employees' positive psychology sources and firms' innovation capability.

The paper has significantly advanced and deepened our understanding of how transformational leaders connect with employees to nurture and develop one of the most special aspects of human resource in contemporary working environment called employees' positive Psy-Cap for stimulating firm's innovation capabilities.