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The construction industry makes an essential contribution to the environmental and economic development of Hong Kong. However, hindered by various factors, construction has long been recognized as an industry with low innovation. Innovation is essential to the productivity, cost effectiveness, and, more importantly, the sustainable development of any organization and industry. Following rapid globalization, technological advancement, and the trend toward partnering between the public and private sectors, the importance of innovation has increased dramatically for construction firms, particularly for large-size construction firms. However, studies investigating the association between leadership and innovation in the construction context are still rare. Using an innovation climate as a proxy for organizational innovation, this study investigates the effect of leadership on the innovation climate in construction firms. A questionnaire survey was designed and distributed to 300 construction professionals in major (Group C) contractor firms in Hong Kong. A hundred and thirteen valid returns were collected, representing a response rate of 37.7%. The data were analyzed using confirmatory factor analysis, Cronbach's alpha reliability analysis, and structural equation modeling using SPSS version 19 and Lisrel version 8.8. Three leadership factors were identified, namely transformational leadership, development exchange leadership, and corrective avoidant leadership. The results of the structural equation modeling revealed that an innovation climate is predicted positively by transformational leadership and is predicted negatively by development exchange leadership. The results of this study have implications for construction academics and practitioners regarding the importance of leadership to foster innovation in the industry. [ABSTRACT FROM AUTHOR]