Applications for Management 30280

3rd Computer Lab Session

Factor Analysis

Part I. Factor Analysis with principal axis factoring

Suppose you are the CEO of an Asian telecommunication company who wants to
explore possible market expansions in the African Region. For this reasons, you are
interested in knowing how African countries are keeping up in terms of making their
transition into a knowledge-based economy and how do they differentiate.
For this purpose, you will make use of the KAM (Knowledge Assessment Methodology)
dataset, an interactive tool created by the Knowledge for Development Program
(World Bank) to help countries to identify the challenges and opportunities they face
in making the transition to the knowledge-based economy.
The KAM consists of 148 structural and qualitative variables for 146 countries to
measure their overall economic performance and their performance on the 4
Knowledge Economy (KE) pillars:

- Economic Incentive and Institutional Regime

- The Innovation System
- Education and Human Resources
- Information and Communications Technologies.

In order to answer to our research question we restricted the sample to African

countries and consider only a subset of observed variables. We opted for a Principal
Axis Factoring (PAF) analysis because our purpose is to identify the latent structures
behind our indicators. In this sense, we aim to find factors to which assign a label.

1) Inspect the dataset (including univariate descriptive analysis) and test

correlations between variables using a correlation matrix.
2) Run the analysis on all the available metric variables, performing a PAF and
asking for all the necessary statistics.
3) We now want to test the statistical significance of the correlations found in the
previous point and to assess whether there is enough overall correlation
between the variables. Which statistical tools do we have to look at?
4) Once we have selected the right set of variables for our factor analysis, we look
at the Communalities table. Do we find any issue regarding the variance shared
by the variables?
5) Let’s consider the different selection criteria for the optimal number of factors
(only one factor from an a priori decision, latent root criterion, percentage of
explained variance (at least 60%), and scree plot). Based on these criteria, how
many factors would you retain?
6) The next step is the interpretation of the resulting factors. First of all, are we
able to interpret factors by means of unrotated factor loadings?
7) Let rotate factors so to end out with a more interpretable solution.
8) Finally, we can give an interpretation of the resulting factors. How would you
label the factors? And how would you deal with the cross-loading problems.
Part II. Principal Component Analysis and ANOVA

Instead of uncovering the latent structure underlying our indicator variables, we just
want to reduce all our set of variables to a single variable for further analyses. As we
are interested in taking into account the whole variability in the data, we opt for a
Principal Component Analysis (PCA).

1) Include all metric variables. Run the analysis on the same data, this time
performing a PCA and asking for just one factor.
2) Observe the table of communalities. Do we have to worry about the two
communalities lower than 0.2 obtained after the extraction?
3) To what extent the resulting component explains the total variability?
4) How do we interpret the resulting component? Save the extracted component as
a factor score.
5) Perform an ANOVA on the factor score to assess whether there are differences
among African sub-regions with respect to our new index. Be careful to put the
African Subregions as the factor. Are there any significant differences between
means?
6) Create dummy variables for the African sub-regions and perform a regression
analysis to detect which pairs of means are different (keep Southern Africa as
the reference category).

Commands:

 To obtain a correlation matrix: Analyze->Correlate->Bivariate

 To run a PAF: Analyze->Dimensions reduction->Factor;
Descriptive-> Determinant; Anti-Image; KMO
Extraction->Method-Principal Axis Factoring; Scree Plot;
Options->Coefficient Display Format –Sorted by size; -Suppress Small Coefficients
 To make rotated solutions: Analyze->Dimensions reduction->Factor; Rotation;
Orthogonal: Varimax, Quartimax, Equamax
Oblique: Direct Oblim, Promax
 To run a PCA analysis: Analyze->Dimensions reduction->Factor.
Extraction->Method- Principal Components Analysis.
Extraction ->Fixed numbers of factors. Factors to extract: 1
 To save the score of the PCA: Analyze->Dimensions reduction->Factor;
Scores-> Save as variable-> Bartlett
 To run ANOVA: Analyze-> Compare means->One-way ANOVA.