Factor Analysis

Business Research Methods

MBA-II
By
Dr. Anusuya Biswas
Factor Analysis
• It is a technique used to reduce a large number of variables into fewer numbers of
factors.
• This technique extracts maximum common variance from all variables and puts them
into a common score. As an index of all variables, we can use this score for further
analysis.
• It is used to estimate a model that explains the variance/covariance between a set of
observed variables (in a population) by a set of (fewer) unobserved factors + weighting
• It is a correlational method used to identify and describe the underlying factors driving
the data values for a large set of variables.
• It identifies correlations between and among variables to bind them into one
underlying factor driving their values.
• Factor analysis is part of general linear model (GLM)
Assumptions
1. Linearity: Factor analysis is also based on linearity assumption. Non-linear variables can also be used. After transfer,
however, it changes into linear variable.
2. Variables must be interrelated
i. 30 unrelated variables = 30 factors
ii. Matrix must have sufficient number of correlations
3. No outlier: Assume that there are no outliers in data.
4. Adequate sample size: The case must be greater than the factor.
5. No perfect multicollinearity: Factor analysis is an interdependency technique. There should not be perfect
multicollinearity between the variables.
6. Homoscedasticity: Since factor analysis is a linear function of measured variables, it does not require homoscedasticity
between the variables.
7. Interval Data: Interval data are assumed.
8. No Normality required
9. sample size
i. sample Minimum = 50, preferable = 100 [respondents/participants] = average of 100 is 10
ii. Min 5 observations/items/variables, preferable = 10 observations/items
i. 5*10 = 100
Purpose of Factor Analysis
• EFA is a data reduction technique
• Objectives: Simplification of items into subset of measures (Discriminant
Validity/Construct Validity)
• Part of construct validation (identifying the patterns in data)
• Assess dimensionality or homogeneity
• Principal component analysis
• Issues:
• Use Principal Component Analysis (PCA)or CFA (Common FA/FA)
• How many factors?
• What type of rotation?
• How to interpret?
• Loadings
• Cross Loadings
 Types of
Factoring

Exploratory Common
FA - PCA FA