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Journal of Business Research 61 (2008) 1203 – 1218

Advancing formative measurement models

Adamantios Diamantopoulos ⁎, Petra Riefler 1 , Katharina P. Roth 2
Department of Business Administration, University of Vienna, Bruenner Strasse 72, A-1210 Vienna, Austria
Received 1 May 2007; received in revised form 1 November 2007; accepted 1 January 2008

Abstract

Formative measurement models were first introduced in the literature more than forty years ago and the discussion about their methodological
contribution has been increasing since the 1990s. However, the use of formative indicators for construct measurement in empirical studies is still
scarce. This paper seeks to encourage the thoughtful application of formative models by (a) highlighting the potential consequences of
measurement model misspecification, and (b) providing a state-of-the art review of key issues in the formative measurement literature. For the
former purpose, this paper summarizes findings of empirical studies investigating the effects of measurement misspecification. For the latter
purpose, the article merges contributions in the psychology, management, and marketing literatures to examine a variety of issues concerning the
conceptualization, estimation, and validation of formative measurement models. Finally, the article offers some suggestions for future research on
formative measurement.
© 2008 Elsevier Inc. All rights reserved.

Keywords: Formative index; Measurement model; Causal indicators

Contents

1. Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1204
2. Reflective vs. formative measurement: first-order models . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1204
3. Higher-order formative models . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1205
4. Measurement model misspecification . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1208
4.1. Parameter bias due to reversed causality . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1208
4.2. Parameter bias due to incorrect item purification . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1210
4.3. Effects on fit statistics . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1210
5. The status quo of formative measures: issues and proposed remedies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1211
5.1. Conceptual issues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1211
5.1.1. Error-free measures. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1211
5.2. Interpretation of the error term . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1211
5.3. Estimation of formative models . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1212
5.3.1. Multicollinearity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1212
5.3.2. Exogenous variable intercorrelations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1212
5.3.3. Model identification . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1213

⁎ Corresponding author. Tel.: +43 1 4277 38031.

E-mail addresses: adamantios.diamantopoulos@univie.ac.at (A. Diamantopoulos), petra.riefler@univie.ac.at (P. Riefler), katharina.roth@univie.ac.at (K.P. Roth).
1
Tel.: +43 1 4277 38038.
2
Tel.: +43 1 4277 38040.

0148-2963/$ - see front matter © 2008 Elsevier Inc. All rights reserved.
doi:10.1016/j.jbusres.2008.01.009
1204 A. Diamantopoulos et al. / Journal of Business Research 61 (2008) 1203–1218

5.4. Reliability and validity assessment of formative models . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1215

5.4.1. Reliability assessment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1215
5.4.2. Validity assessment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1215
6. Conclusion and future research . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1216
References . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1216

1. Introduction The section that follows provides a brief conceptual dis-

The literature in psychology, management, and marketing
pays increasing attention to formative measurement models for
operationalizing latent variables (constructs). Researchers in
various disciplines have undertaken considerable effort to (a)
make the academic community aware of the existence of
formative (cause, causal) indicators (e.g., Bollen and Lennox,
1991), (b) demonstrate the potential appropriateness of formative
measurement models for a large number of latent constructs (e.g.,
Diamantopoulos, 1999; Fassot and Eggert, 2005; Fassot, 2006;
Jarvis, MacKenzie and Podsakoff, 2003; Venaik, Midgley and
Devinney, 2004), (c) reveal consequences of measurement model
misspecification (e.g., Diamantopoulos and Siguaw, 2006; Law
and Wong, 1999; MacKenzie, Podsakoff and Jarvis, 2005), and
(d) develop practical guidelines for the construction of multi-item
measures (indexes) comprising formative indicators (e.g.,
Diamantopoulos and Winklhofer, 2001; Eggert and Fassot,
2003; Giere, Wirtz and Schilke, 2006). Despite the growing
number of contributions on formative measurement, however,
Bollen's (1989, p. 65) statement still holds true as even a cursory
glance in the top management and marketing journals readily
reveals, that is, “[M]ost researchers in the social sciences assume
that indicators are effect indicators. Cause indicators are
neglected despite their appropriateness in many instances”.
Two reasons help explain the prevalent lack of applications.
On the one hand, a substantial number of researchers engaging in
measure development might still be unaware of the potential
appropriateness of formative indicators for operationalizing
particular constructs (Hitt, Gimeno and Hoskisson, 1998;
Podsakoff, Shen and Podsakoff, 2006); indeed “nearly all
measurement in psychology and the other social sciences assumes
effect indicators” (Bollen, 2002, p. 616). On the other hand,
researchers might hesitate to specify formative measurement
models because they “are often uncertain how to incorporate them
into structural equation models” (Bollen and Davis, 1994, p. 2).
Indeed, there are a number of controversial and not fully resolved
issues concerning the conceptualization, estimation and valida-
tion of formative measures (e.g., see Howell et al., 2007, 2008-
this issue) including, among others, the treatment of indicator
multicollinearity, the assessment of indicator validity, and the
interpretation of formatively-measured constructs.
This article provides insights into the current state of literature
on formative measurement by merging major contributions in the
psychology, management and marketing literatures into an
overall picture. The overall aim is to encourage the appropriate
use of formative indicators in empirical research while at the
same time highlighting potentially problematic issues and sug-
gested remedies.
cussion of reflective and formative measurement models. The
subsequent section covers the problem of measurement model
misspecification, followed by a discussion of its consequences.
Next, the article turns attention to a number of critical issues
concerning the specification, estimation, and validation of for-
mative measures. Finally, the paper concludes by proposing
some directions for future research.
2. Reflective vs. formative measurement: first-order models
The assessment of latent variables has a long tradition in
social science (e.g., Churchill, 1979; Duncan, 1984; Nunally,
1978). Latent variables are phenomena of theoretical interest
which cannot be directly observed and have to be assessed by
manifest measures which are observable. In this context, a
measurement model describes relationships between a construct
and its measures (items, indicators), while a structural model
specifies relationships between different constructs (Edwards
and Bagozzi, 2000; Scholderer and Balderjahn, 2006).
Anderson and Gerbing (1982, p. 453) note that “the reason
for drawing a distinction between the measurement model and
the structural model is that proper specification of the
measurement model is necessary before meaning can be
assigned to the analysis of the structural model”. The
measurement model (which is of focal interest in this paper)
specifies the relationship between constructs and measures. In
this respect, the direction of the relationship is either from the
construct to the measures (reflective measurement) or from the
measures to the construct (formative measurement).
The first form of specification, that is, the reflective
measurement model (see Fig. 1, Panel 1), has a long tradition
in social sciences and is directly based on classical test theory
(Lord and Novick, 1968). According to this theory, measures
denote effects (or manifestations) of an underlying latent
construct (Bollen and Lennox, 1991). Therefore, causality is
from the construct to the measures. Specifically, the latent
variable η represents the common cause shared by all items xi
reflecting the construct, with each item corresponding to a linear
function of its underlying construct plus measurement error:
x i ¼ ki g þ e i ð1Þ
where xi is the ith indicator of the latent variable η, εi is the
measurement error for the ith indicator, and λi is a coefficient
(loading) capturing the effect of η on xi. Measurement errors
are assumed to be independent (i.e., cov(εi, εj) = 0, for i ≠ j)
and unrelated to the latent variable (i.e., cov(η, εi) = 0, for
all i).
 A. Diamantopoulos et al. / Journal of Business Research 61 (2008) 1203–1218
Fig. 1. Alternative measurement models.
Eq. (1) is a simple regression equation where the observable
measure is the dependent variable and the latent construct is the
explanatory variable. A fundamental characteristic of reflective
models is that a change in the latent variable causes variation
in all measures simultaneously; furthermore, all measures in a
reflective measurement model must be positively intercorre-
lated (for a proof, see Bollen, 1984).
The second form of specification, that is, the formative
measurement model, was first proposed by Curtis and Jackson
(1962) who challenge the characteristic of positively correlated
measures as a necessary condition. They argue that in specific
cases measures show negative or zero correlations despite
capturing the same concept. Blalock (1964, 1968, 1971) and
Land (1970) subsequently discuss this alternative measurement
perspective according to which measures are causes of the
construct rather than its effects (see Fig. 1, Panel 2). In other
words, the indicators determine the latent variable which
receives its meaning from the former. Some typical examples
are socio-economic status (Hauser and Goldberger, 1971;
Hauser, 1973), quality of life (e.g., Bollen and Ting, 2000,
Fayers, Hand, Bjordal and Groenvold, 1997;), or career success
(e.g., Judge and Bretz, 1994); Table 1 provides further
examples.
The formal specification of the formative measurement
model is:
X
n
g¼ gi xi þ f ð2Þ
i¼1
where γi is a coefficient capturing the effect of indicator xi on
the latent variable η, and ζ is a disturbance term. The latter
comprises all remaining causes of the construct which are not
represented in the indicators and are not correlated to the latter;
thus following the assumption that cov(xi,ζ) = 0.
Eq. (2) represents a multiple regression equation and in
contrast to Eq. (1), the latent variable is the dependent variable
and the indicators are the explanatory variables. Diamantopoulos
and Winklhofer (2001) point out several characteristics of this
model which make it sharply distinct from the reflective model.
First, the indicators characterize a set of distinct causes which are
not interchangeable as each indicator captures a specific aspect of
1205
the construct's domain (see also Jarvis et al., 2003; and Rossiter,
2002); indeed, omitting an indicator potentially alters the nature
of the construct (Bollen and Lennox, 1991). Second, there are no
specific expectations about patterns or magnitude of intercorrela-
tions between the indicators; formative indicators might correlate
positively or negatively or lack any correlation (for a detailed
discussion see Bollen, 1984). Third, formative indicators have no
individual measurement error terms, that is, they are assumed to
be error-free in a conventional sense (Edwards and Bagozzi,
2000). The error term (ζ) is specified at the construct level
(MacCallum and Browne, 1993) and does not constitute
measurement error (Diamantopoulos, 2006). Fourth, a formative
measurement model, in isolation, is underidentified and, there-
fore, cannot be estimated (Bollen, 1989; Bollen and Davis,
1994). In contrast, reflective measurement models with three or
more indicators are identified and can be estimated (e.g., see
Long, 1983). A later section of this paper addresses the
estimation of formative models.
3. Higher-order formative models
The formative model specified in Eq. (2) is a first-order
measurement model (Edwards, 2001). However, constructs are
often conceptualized and subsequently operationalized as
multidimensional entities (e.g., Brewer, 2007; Lin, Sher and
Shih, 2005; Venaik et al., 2004; Yi and Davis, 2003). From a
conceptual point of view, a construct is multidimensional “when
it consists of a number of interrelated attributes or dimensions
and exists in multidimensional domains. In contrast to a set of
interrelated unidimensional constructs, the dimensions of a
multidimensional construct can be conceptualized under an
overall abstraction, and it is theoretically meaningful and
parsimonious to use this overall abstraction as a representation
of the dimensions” (Law, Wong and Mobley, 1998, p. 741).
When dealing with multidimensional constructs, it is
necessary to distinguish between (at least) two levels of
analysis, that is, one level relating manifest indicators to
(first-order) dimensions, and a second level relating the
individual dimensions to the (second-order) latent construct
(Jarvis et al., 2003; MacKenzie et al., 2005). Failing to carefully
specify the latter relationships, “one cannot derive the overall
1206 A. Diamantopoulos et al. / Journal of Business Research 61 (2008) 1203–1218

Table 1
Examples of formatively-measured constructs
Author(s) Journal Formative construct(s) Estimation method
Consumer behavior literature
Lin et al. (2005) International Journal of Service Customer perceived value SEM a
Industry Management
Hyman et al. (2002) Journal of Marketing Theory and Practice Household affluence MIMIC model
Sánchez-Pérez and Iniesta-Bonillo (2004) Journal of Business and Psychology Consumers' commitment towards retailers MIMIC model

Information technology literature

Brock and Zhou (2005) Internet Research Organizational internet use SEM (PLS) a
Pavlou and Gefen (2005) Information Systems Research Psychological contract violation SEM (PLS) a
Perceived effectiveness of
institutional structures
Santosa et al. (2005) European Journal of Information Systems Intrinsic motivators SEM (PLS) a
Situational motivators
Yi and Davis (2003) Information Systems Research Observational learning SEM (PLS) a

Management literature
Helm (2005) Corporate Reputation Review Firm reputation SEM (PLS) a
Venaik et al. (2005) Journal of International Business Studies Environmental controls: SEM (PLS) a
– Local government regulatory influence
– Quality of local business infrastructure
– Pressures of global competition
– Pressures from technological change
Witt and Rode (2005) Journal of Enterprising Culture Corporate identity SEM (PLS) a
Corporate culture
Dowling (2004) Corporate Reputation Review Corporate descriptors Regression model
Corporate reputation
Venaik et al. (2004) Management International Review Firm pressures SEM (PLS) a
Johansson and Yip (1994) Strategic Management Journal Industry drivers SEM (PLS) a
Organization structure
Management process
Global strategy

Marketing literature
Bruhn et al. (2008-this issue) In this Special Issue Customer equity management SEM (PLS, LISREL)
Cadogan et al. (2008-this issue) In this Special Issue Quality of market-oriented behaviors MIMIC model
(LISREL)
Brewer (2007) Journal of International Marketing Psychic distance n.a.
Collier and Bienstock (2006) Journal of Service Research e-service quality SEM (AMOS) a
Johnson et al. (2006) Journal of Advertising Perceived interactivity: SEM (EQS) a
– Reciprocity
– Responsiveness
– Nonverbal information
– Speed of response
Ulaga and Eggert (2006) Journal of Marketing Relationship value SEM with summated
dimension scores (PLS)
Reinartz et al. (2004) Journal of Marketing Research CRM process implementation MIMIC model
Arnett et al. (2003) Journal of Retailing Retailer equity MIMIC model
Homburg et al. (2002) Journal of Marketing Service orientation Composite score
Winklhofer and Diamantopoulos (2002) International Journal of Research in Marketing Sales forecasting effectiveness MIMIC model
Homburg et al. (1999) Journal of Marketing Marketing's influence SEM (LISREL) a
Market-related complexity
a
Identification achieved through linkage to two or more reflective constructs.

construct from its dimensions and can only conduct research at
the dimensional level, even though these dimensions are
claimed theoretically to be under an overall construct“ (Law
et al., 1998, p. 741). Since for each level both formative or
reflective specifications are applicable, Jarvis et al. (2003)
identify four different types of multidimensional constructs,
namely, (a) formative first-order and formative second-order
(synonyms for this model are “aggregate model”, “composite
model”, “emergent model” and “indirect formative model”; e.g.,
see Cohen et al., 1990; Edwards and Bagozzi, 2000; Giere et al.,
2006; Law et al., 1998; Law and Wong, 1999), (b) reflective
first-order and formative second-order, (c) formative first-order
and reflective second-order, and (d) reflective first-order and
reflective second-order models (synonyms for this type of
model are “latent model”, “factor model”, “superordinate
construct”, “indirect reflective model” and “second-order total
disaggregation model”; see Bagozzi and Heatherton, 1994;
Edwards, 2001; Edwards and Bagozzi, 2000; Giere et al., 2006;
 A. Diamantopoulos et al. / Journal of Business Research 61 (2008) 1203–1218 1207

Law et al., 1998). Since this review focuses on formative
measurement, this section only briefly discusses the former
three types of multidimensional constructs (see Fig. 2).
The first model in Fig. 2 (Type I) conceptualizes the
multidimensional construct as a composite of its dimensions
such that the arrows point from the dimensions to the construct
(Williams, Edwards and Vandenberg, 2003). The dimensions are
thus analogous to formative measures; however, in contrast to
the traditional conceptualization of formative measures as
observed variables (see Eq. (2)), the dimensions are themselves
constructs and conceived as specific components of the second-
order construct (Edwards, 2001). In this type of model, the error
term exists both at the level of the individual (first-order)
dimensions and at the overall construct level. Table 1 provides a
number of empirical illustrations of Type I formative multi-
dimensional constructs (e.g., Arnett, Laverie, and Meiers, 2003;
Brewer, 2007; Reinartz, Krafft and Hoyer, 2004; Venaik et al.,
2004; Venaik, Midgley and Devinney, 2005; Witt and Rode,
2005; Yi and Davis, 2003; see also Bruhn et al., 2008-this issue).
For example, Yi and Davis' (2003) construct of “obser-
vational learning processes” comprises four formative first-
order dimensions, namely “attention processes”, “retention
processes”, “production processes”, and “motivation processes”.
The second type of model shown in Fig. 2 (Type II) represents
a second-order construct with first-order formative dimensions
which are themselves measured by several reflective manifest
items. According to this conceptualization, the error term exists at
two different levels, namely (a) at the level of the manifest
indicators, where it represents measurement error, and (b) at the
level of the second-order construct, where it captures the amount
of variance in the second-order construct which the first-order
dimensions do not account for. As Type II models have been
introduced rather recently, only most recent literature provides
empirical examples of its use (e.g., Johnson, Bruner and Kumar

Fig. 2. Higher-order formative models (adapted from Jarvis et al., 2003, p. 205).
1208 A. Diamantopoulos et al. / Journal of Business Research 61 (2008) 1203–1218
et al., 2006; Lin et al., 2005; see also Ruiz et al., 2008-this issue).
For example, Lin et al. (2005) conceptualize the construct of
“customer perceived value” as a second-order factor which is
formed by five reflectively specified first-order dimensions,
namely “monetary sacrifice”, “website design”, “fulfillment/
reliability”, and “security/privacy”.
The third model illustrated in Fig. 2 (Type III) has first-order
factors as reflective dimensions, but the first-order dimensions
themselves have formative indicators. For this reason, the error
term exists at the level of the first-order dimensions only and
represents both the variance not explained by the manifest
indicators (due to the formative specification of the first-order
dimensions) and variance not explained by the underlying
(higher-order) construct. Although Jarvis et al. (2003) include
this model in their typology, literature has not explicitly
recognized this kind of model, and empirical examples remain
virtually non-existent. The reasons for this are threefold (see
also Albers and Götz, 2006). First, as noted above, the nature of
the error term is difficult to interpret due to the endogenous
position of the formative first-order dimensions. Second,
formative indicators capture different facets of a construct and
are therefore not interchangeable (Diamantopoulos and Winkl-
hofer, 2001). These indicators give the first-order dimensions
their meaning, which, by definition, has to be different for each
dimension because of the formative specification (Rossiter,
2002). Since a reflective specification at the second-order level
implies that the dimensions are manifestations of a second-order
construct, it is unclear whether the meaning of the dimensions is
attributable to the formative indicators or to the underlying
common cause. Third, Type III models cannot be estimated
using current procedures for achieving identification of
formative constructs (see section on model identification later
in this paper). In short, Type III models do not represent an
appealing option for specifying multidimensional constructs.
4. Measurement model misspecification
A number of researchers criticize the prevalent neglect of
explicit measurement model specification underlying scale
construction efforts (Diamantopoulos and Winklhofer, 2001;
Eberl, 2006; Fassot, 2006; Fassot and Eggert, 2005; Fornell and
Bookstein, 1982; Jarvis et al., 2003; Podsakoff et al., 2006).
Most researchers apply scale development procedures without
even questioning their appropriateness for the specific construct
at hand (see also Albers and Hildebrandt, 2006; Williams et al.,
2004; for a noteworthy exception see Eberl and Schweiger,
2005); indeed, Diamantopoulos and Winklhofer (2001, p. 274)
speak of an “almost automatic acceptance of reflective
indicators”. Consequently, misspecification commonly con-
cerns the adoption of reflective indicators where formative
indicators (and thus index construction approaches) would be
appropriate (which is a Type I error in Diamantopoulos and
Siguaw's (2006) terminology). The other case of misspecifica-
tion, that is, the incorrect adoption of a formative model where
indeed a reflective would be appropriate (Type II error), is rather
negligible (Fassot, 2006; Jarvis et al., 2003). An explanation for
this difference in evidence of Type I and Type II errors is the
fact that standardized development procedures for reflective
scales have been established over the years (e.g., see Churchill,
1979; DeVellis, 2003; Netemeyer, Bearden and Sharma, 2003;
Spector, 1992), whereas concrete guidelines for the construction
of formative indixes have been proposed very recently
(Diamantopoulos and Winklhofer, 2001; Eggert and Fassot,
2003; Giere et al., 2006).
Jarvis et al. (2003) assess the degree of misspecification for
studies published in four major marketing journals (Journal of
Marketing, Journal of Marketing Research, Marketing Science,
and Journal of Consumer Research). Even though they apply a
conservative evaluation approach (i.e., classifying operationaliza-
tions as correct in case that either reflective or formative measures
could in general apply), they find about a third of all studies to be
subject to measurement model misspecification. Fassot (2006)
applies Jarvis et al.'s (2003) approach to three major German
management journals (Zeitschrift für Betriebswirtschaft, Zeitschrift
für betriebswirtschaftliche Forschung, Die Betriebswirtschaft) and
reports similar results (i.e., 35% of all investigated studies include
misspecified constructs). In a similar effort, Fassot and Eggert
(2005) calculate a misspecification rate of some 80% for a major
German marketing journal (Marketing ZFP).
This problematic situation is not unique to marketing literature.
In similar efforts, Podsakoff et al. (2006) reveal inappropriate
modeling for 62% of constructs published in three major strategic
management journals (Academy of Management Journal, Admin-
istrative Science Quarterly, Strategic Management Journal),
while Podsakoff, MacKenzie, Podsakoff and Lee (2003) report a
misspecification rate of 47% for leadership research (including
publications in The Leadership Quarterly, Journal of Applied
Psychology, and again Academy of Management Journal).
Given this documented existence of measurement model
misspecification, the obvious question is to what extent
misspecification does impact on model estimates and fit
statistics. This question is important because “any bias in the
estimates […] could affect the conclusions about the theoretical
relationships among the constructs drawn from the research”
(Jarvis et al., 2003, p. 207).
The literature review identifies six studies empirically
investigating the consequences of measurement model mis-
specification. Table 2 categorizes these studies along two
characteristics. The first characteristic refers to the source of
bias investigated, which is either (a) the wrongly specified
direction of causality between a given set of indicators and a
construct, or (b) the application of an inappropriate item puri-
fication procedure (i.e., purifying formative indicators accord-
ing to guidelines applicable for reflective indicators). The
second characteristic refers to the position of the focal mis-
specified construct in the structural model, which is either
exogenous or endogenous. A discussion of the findings of these
studies follows.
4.1. Parameter bias due to reversed causality
Jarvis et al. (2003), Law and Wong (1999), and MacKenzie
et al. (2005) examine the impact of incorrect causal direction,
that is, the specification of a reflective measurement model
Table 2
Empirical studies on consequences of measurement model misspecification
Focus (reason for estimation Data set Technique Structural parameter estimates a Model fit b Additional findings
bias)
Exogenous Endogenous Exogenous Endogenous
construct construct construct construct
misspecified misspecified misspecified misspecified

A. Diamantopoulos et al. / Journal of Business Research 61 (2008) 1203–1218

Law and Wong Reversed causality Survey data SEM Overestimation Not tested CFI ≈ Not tested Also biases in model relationships
(1999) (RAMONA) NFI ≈ which do not involve the misspecified
NNFI ≈ construct
IFI ≈
TLI ≈
χ2 / df ↑
Edwards (2001) Reversed causality Published SEM (LISREL, Underestimation c Over- and CFI ↓ Not comparable Concluded that both, the
covariance matrices RAMONA) underestimation of RMSEA ↑ (df = 0 and perfect multidimensional formative and
of survey data some parameters χ2 / df ↑ fit of formative reflective specification were inferior
models) to a multivariate structural model
Jarvis et al. (2003) Reversed causality Simulated data Monte Carlo Overestimation UnderestimationCFI ≈ Item correlation found to be negatively
simulation (335% to 555%) (88% to 93%) GFI ↑ related to magnitude of estimation bias
RMSEA ≈
SRMR ≈
χ2 / df ↑
MacKenzie et al. Reversed causality Simulated data Monte Carlo Overestimation Underestimation CFI ↓ CFI ↓ Type II error increases if endogenous
(2005) simulation (on average: 429%) (on average: 84%) GFI ≈ GFI ↓ or both constructs are misspecified
RMSEA ↑ RMSEA ↑
SRMR ≈ SRMR ↑
Albers and Reversed causality and Simulated data SEM (PLS, No bias Not tested Not given Not tested
Hildebrandt (2006) incorrect indicator purification LISREL) (stated that fit
indices were
similarly good)
Diamantopoulos and Incorrect indicator purification Survey data Regression Underestimation d Not tested CFI ≈ Not tested
Siguaw (2006) analysis GFI ≈
RMSEA ↑
NNFI ≈
χ2 / df ↑
a
Unstandardized parameter estimates.
b
≈ Goodness-of-fit index for reflective and formative model similar (difference +/−.05).
c
Edwards (2001) estimates several second-order models, this comparison concerns the Congeneric and Estimated Loadings Models.
d
R-squares compared.

1209
1210 A. Diamantopoulos et al. / Journal of Business Research 61 (2008) 1203–1218
when a formative model is conceptually appropriate, for
exogenous latent variables. All three studies reveal an over-
estimation of structural parameters when the latent variable is
affected by misspecification. In some cases, the (incorrect)
reflective specification even yields a significant parameter
estimate, whereas the parameter estimate is not significant in the
(correct) formative specification. Thus, the impact of the focal
latent variable on other constructs in the structural model tends
to be overestimated.
Jarvis et al. (2003) and MacKenzie et al. (2005) additionally
examine the impact of incorrect specifications of endogenous
latent variables. In contrast to the exogenous case, both studies
report an underestimation of the parameter estimate capturing
the impact of antecedent variables on the focal construct. An
explanation for these distinct findings of under- and over-
estimation for endogenous and exogenous positions, respec-
tively, is the difference in portions of variance accounted for by
reflective and formative operationalizations. Specifically, a
reflective treatment of a formative construct reduces the
variance of the construct (see Fornell, Rhee and Yi, 1991 or
Namboodiri, Carter and Blalock, 1975) because the variance of
a reflectively-measured construct equals the common variance
of its measures, whereas the variance of a formatively-measured
construct encompasses the total variance of its measures (Law
and Wong, 1999). Consequently, if a misspecification reduces
the variance of the exogenous variable while the level of the
variance of the endogenous variable is maintained, the
parameter estimate for their relationship increases. In contrast,
if a misspecification reduces the variance of the endogenous
variable while the variance of the exogenous variable is
unchanged, the relevant structural parameter estimate decreases.
In any case, these analyses reveal that structural paths are
either overestimated or underestimated as a result of measure-
ment model misspecification with undesirable effects on the
substantive interpretation of the structural model relationships.
4.2. Parameter bias due to incorrect item purification
To fully capture the meaning of a formatively-measured
construct, a census of indicators is (ideally) required because
“[o]mitting an indicator is omitting a part of the construct”
(Bollen and Lennox, 1991, p. 308). Therefore, an omission of
indicators is equivalent to restricting the domain of the construct
(MacKenzie et al., 2005). In the context of index construction,
this characteristic implies that the elimination of formative items
from the item pool has to be theoretically justified rather than
purely based on statistical properties (Diamantopoulos and
Winklhofer, 2001; Diamantopoulos and Siguaw, 2006). Indeed,
“internal-consistency checks on cause-indicators may lead
researchers to discard valid measures improperly” (Bollen,
1984, p. 381) and “following standard scale development
procedures – for example dropping items that possess low item-
to-total correlations – will remove precisely those items that
would most alter the empirical meaning of the construct” (Jarvis
et al., 2003, p. 202; see also MacKenzie, 2003).
In light of the extensive presence of measurement model
misspecification discussed earlier, recent studies examine the
consequences of applying conventional scale development
procedures on formative measures. Fassot (2006) provides an
example of a misspecified measure that leads to a neglect of a
key aspect of the focal construct. More specifically, “perceived
friendliness of the staff” is erroneously dropped from a measure
of hospital quality due to not meeting conventional standards
for reflective items (i.e., high item-total correlations), however,
despite being a key aspect of a hospital's quality assessment. In
line with this example, Diamantopoulos and Siguaw (2006) find
that the same initial item pool results in considerably differing
final item sets under reflective and formative purification
guidelines respectively. The former approach eliminates items
with low inter-item correlations, whereas the latter drops items
with high inter-item correlations (thus causing problems of
multicollinearity). In Diamantopoulos and Siguaw's (2006)
example, the resulting scale and index share not more than two
out of 30 initial items. Their study therefore demonstrates how
erroneous reflective scale purification processes can substan-
tially alter the meaning of formative constructs.
Albers and Hildebrandt (2006) address the issue of
parameter estimation bias due to incorrect indicator purification.
First, the authors compare parameter estimates of a reflectively
and a formatively specified measurement model using the full
item set prior to purification. Second, they compare two
formatively specified models, once using the full item pool (i.e.,
in accordance with the requirement of a census of items) and
once using a reduced item set following purification guidelines
for reflective scales. The latter comparison reveals an extensive
underestimation of structural parameters, while the former
shows no significant differences. Therefore, in this example, it
is the erroneous purification rather than the causal order
misspecification that impacts on parameter bias.
4.3. Effects on fit statistics
The studies in Table 2 also examine the impact of
misspecification on goodness-of-fit indices for the overall (i.e.,
measurement and structural) model. An intuitive expectation is
that the consequences of misspecification in terms of changed
construct meanings and biased parameter estimates would also
lead to poor model fit. However, the majority of models
incorporating misspecified constructs show highly acceptable
values for CFI, GFI, SRMR and RMSEA. Moreover, these
values are similar to the goodness-of-fit values obtained for the
corresponding correctly specified model. For example, Mac-
Kenzie et al. (2005, p. 724) conclude from their study that “each
of the four goodness-of-fit indices failed to detect the
misspecification of the measurement model”. This equally
applies to all other studies listed in Table 2. Only the chi-square
(per degree of freedom) statistic shows to be consistently higher
in the wrongly reflectively specified models throughout the
studies, thus providing some indication of the underlying
misspecification.
Summarizing, all studies empirically examining the con-
sequences of measurement model misspecification on para-
meter estimates report serious under- or overestimation of
parameters as a consequence of misspecified causality, wrongly
 A. Diamantopoulos et al. / Journal of Business Research 61 (2008) 1203–1218
adopted purification procedures, or a combination of both. Such
biases may in turn lead to incorrect conclusions on tested
relationships, thus putting many empirical results into question.
Especially alarming is the fact that a satisfactory overall model
fit does not guarantee a correct specification and that
misspecifications are not detected by poor fit index values. It
is to hope that the empirical demonstration of the undesirable
consequences of measurement model misspecification will
yield more echo to Bagozzi's (1984) and Jarvis et al.'s (2003)
call to conceptually justify measurement relationships as
hypotheses and subsequently test them empirically.
5. The status quo of formative measures: issues and
proposed remedies
As the introductory section already outlines, literature has
only recently started to pay serious attention to formative
measurement models and empirical applications are still rare.
As a result, experience with formative measures is limited and
several conceptual and practical issues are not fully clarified yet.
The following sections discuss such issues and highlight
various (sometimes contradicting) views of proposed remedies.
5.1. Conceptual issues
5.1.1. Error-free measures
Formative measurement models incorporate the error term at
the construct level and specify individual indicators to be error-
free (see Eq. (2) earlier). Some researchers find this non-
existence of measurement error hard to accept. Edwards and
Bagozzi (2000), for example, regard such an assumption as
untenable in most situations. Addressing this objection, a model
such as the one depicted in Fig. 3 is worth considering as one
way of incorporating measurement error to formative measure-
ment models. This model is similar to Edwards and Bagozzi's
(2000) “spurious model” with multiple common causes, with
the only difference that the latent variables are intentionally
introduced to enable the accommodation of measurement error
in the indicators.
This model inserts a latent variable ξi for each formative
indicator xi so that the focal latent variable η is indirectly linked
to the indicators xi via the latent exogenous constructs ξi. Doing
Fig. 3. Modified formative model with individual error terms.
1211
so, each formative indicator becomes a (single) reflective
measure of its respective latent variable ξi and consequently
comprises an error term; hence, the assumption of error-free
indicators is relaxed.
Although this model has the substantial advantage of
incorporating measurement error, its conceptual justification is
questionable for several reasons. First, the inclusion of the first-
order constructs ξi introduces a “fictitious” level, which
adversely affects model parsimony and suggests that a latent
variable can more or less automatically be specified for any
manifest variable. Second, given that the xi are not directly
linked to η, they cannot be legitimately considered to be
indicators of η because indicators need to be linked by means of
a direct relationship to the construct they assess. Third, the
measures of the ξi in Fig. 3 are single-indicators with all
drawbacks such indicators entail (such as high specificity, and
low reliability). As a discussion of potential problems with
single item measures is beyond the scope of this paper, the
reader is referred to Gardner, Cummings, Dunham and Pierce
(1998) and Nunnally and Bernstein (1994) for further details.
5.2. Interpretation of the error term
Eq. (2) and Fig. 1 (Panel 2) show that a formative measurement
model specification includes an error (disturbance) term at the
construct level. This error term represents the surplus meaning of
the construct (Jarvis et al., 2003; Temme 2006) which is not
captured by the set of formative indicators included in the model
specification. Diamantopoulos (2006, p. 7) points out that
“previous discussions of the error term are often problematic
and fail to provide […] a clear interpretation of exactly what the
error term represents”. Jarvis et al. (2003), for example, describe
the error term as the collective (i.e., overall) random error of all
formative indicators taken as a group, while MacKenzie et al.
(2005, p. 712) interpret the error estimate as capturing “the
invalidity of the set of measures — caused by measurement error,
interactions among the measures, and/or aspects of the construct
domain not represented by the measures”. However, the first
source of error, that is, measurement error, is conceptually
incorrect. Diamantopoulos (2006) demonstrates that the error
term does not represent measurement error because formative
indicators are specified to be error-free and, therefore, measure-
ment error cannot be included in the error term at the construct
level. The second source, that is, measure interactions, is
statistically plausible but lacks substantive interpretation. Since
formative indicators determine the meaning of the latent variable,
it is not possible to separate the construct's meaning from the
indicators' content (Diamantopoulos, 2006). If two indicators
show interaction effects, these effects would also form the
construct's meaning as both indicators separately do. The third
source, is indeed the correct interpretation of the nature of the
error term, that is, aspects of the construct domain not represented
by the indicators. Specifically, “the error term in a formative
measurement model represents the impact of all remaining causes
other than those represented by the indicators included in the
model” (Diamantopoulos, 2006, p. 11). Formative latent variables
have a number of proximal causes which researchers try to
1212 A. Diamantopoulos et al. / Journal of Business Research 61 (2008) 1203–1218
identify when conceptually specifying the construct. However, in
many cases researchers will be unable to detect all possible causes
as there may be some which have neither been discussed in prior
literature nor revealed by exploratory research. The construct-
level error term represents these missing causes. This means that
the more comprehensive the set of formative indicators specified
for the construct, the smaller the influence of the error term.
Williams et al. (2003, p. 908) note in this context that “as the
variance of the residual increases, the meaning of the construct
becomes progressively ambiguous”.
5.3. Estimation of formative models
5.3.1. Multicollinearity
Multicollinearity is an undesirable property in formative
models as it causes estimation difficulties (Albers and Hildeb-
randt, 2006; Diamantopoulos and Winklhofer, 2001). These
estimation problems arise because a multiple regression links the
formative indicators to the construct (see Eq. (2)). Substantial
correlations among formative indicators result in unstable
estimates for the indicator coefficients γi and it becomes difficult
to separate the distinct influence of individual indicators on the
latent variable η. Diamantopoulos and Winklhofer (2001) further
note that multicollinearity leads to difficulties in assessing
indicator validity on the basis of the magnitude of the parameters
γi (Bollen, 1984; MacKenzie et al., 2005).
Literature proposes different approaches for dealing with
multicollinearity. Bollen and Lennox (1991) argue that indica-
tors which highly intercorrelate are almost perfect linear
combinations and thus quite likely contain redundant informa-
tion. Based on this view, several authors (e.g., Diamantopoulos
and Winklhofer, 2001; Götz and Liehr-Gobbers, 2004) suggest
indicator elimination based on the variance inflation factor
(VIF), which assesses the degree of multicollinearity. Some
empirical studies on formative measure development (e.g.,
Diamantopoulos and Siguaw, 2006; Helm, 2005; Sánchez-Pérez
and Iniesta-Bonillo, 2004; Witt and Rode, 2005) follow this
advice usually by applying the commonly accepted cut-off value
of VIF N 10 or its tolerance equivalent (see Giere et al., 2006;
Hair, Anderson, Tatham and Black, 1998; Kennedy, 2003).
However, considering that this multicollinearity check leads to
indicator elimination on purely statistical grounds and given the
danger of altering the meaning of the construct by excluding
indicators (Bollen and Lennox, 1991), “[i]ndicator elimination –
by whatever means – should not be divorced from conceptual
considerations when a formative measurement model is
involved” (Diamantopoulos and Winklhofer, 2001, p. 273).
Albers and Hildebrandt (2006) put forward a different
approach for overcoming multicollinearity by combining
formative indicators into an index (using either an arithmetic
or geometric mean) and using the latter as a single-item
construct in the subsequent analysis. However, although
intuitively appealing, this suggestion raises two important
questions. First, what is the interpretation of the joint index of
two indicators in terms of its substantial meaning? If, for
example, income and age show a high intercorrelation (which
appears to be a likely assumption) and their measures are
consequently combined into an index, what exactly does this
index capture? Second, having included this index into Eq. (2),
what kind of information does its corresponding regression
parameter estimate provide? Is it the impact of a joint unit
change in both, the income and the age?
5.3.2. Exogenous variable intercorrelations
One general issue when specifying measurement models is
the specification of inter-indicator correlations. In reflective
models, a common approach is to free all covariances among
exogenous variables allowing for intercorrelations. In formative
models, following this strategy leads to a large number of
additional parameters, namely correlation estimates of covar-
iances between (a) formative indicators within a construct, (b)
formative indicators between constructs, and (c) exogenous
latent constructs (Bollen and Lennox, 1991; MacCallum and
Browne, 1993).
Bollen and Lennox (1991) recommend allowing for inter-
correlation of formative measures which relate to the same
construct (without, however, expecting any specific pattern).
Furthermore, they argue that for both reflectively and
formatively-measured constructs it is likely, but though not
necessary, that item correlations within constructs exceed item
correlations between constructs. Based on this argument,
MacCallum and Browne (1993) consider two possible
approaches of specifying correlations.
The first approach specifies formative indicators of the same
construct to be correlated with each other but uncorrelated with
indicators of other constructs. The obvious advantage of this
procedure is that it retains model parsimony as no non-
hypothesized paths are added. The obtained goodness-of-fit
indices are hence solely based on the hypothesized relation-
ships, that is, the relationships of interest. The shortcoming of
this approach, however, is that the fixing of covariances to zero
leads to blocks of zeros in the implied covariance matrix. These
zero covariances assume that the corresponding indicators and/
or latent variables are perfectly uncorrelated. MacCallum and
Browne (1993) note that this assumption implies substantive
meaning for the model which requires theoretical justification.
They therefore refrain from recommending this approach. Jarvis
et al. (2003) further argue that any common cause of the
concerned variables that is not incorporated in the model
contributes to a lack of model fit. Consequently, they also
conclude that fixing covariances to zero is an inappropriate
method.
The second approach specifies formative indicators to be
correlated with each other as well as with indicators of other
constructs or exogenous variables. The major advantage of this
method is that all variables are allowed to covary instead of
assuming complete independence which is theoretically not
justifiable. This approach, however, also raises a number of
problematic issues. First, the number of parameters to be
estimated increases, thereby decreasing the number of degrees
of freedom. Second, MacCallum and Browne (1993) empiri-
cally show that the additional parameters provide little ex-
planatory value. Consequently, models lack parsimony without
providing substantive meaning in explaining inter-measure
 A. Diamantopoulos et al. / Journal of Business Research 61 (2008) 1203–1218 1213

relationships. Furthermore, the estimates for unhypothesized ture of these two approaches, that is, adding a single reflective
parameters influence the overall model fit, even though they are indicator and a reflectively-measured construct as an outcome
not of interest. Despite these shortcomings, MacCallum and variable.
Browne (1993) recommend this method compared to the option
of having zero blocks in the implied covariance matrix. Jarvis et 5.3.3.1. Adding two reflective indicators. The first option is
al. (2003) agree on that fact but stress that locating the impact of adding two reflective measures to the set of formative indicators
the non-hypothesized parameter estimates on the model fit is (see Fig. 4). Jarvis et al. (2003) and MacKenzie et al. (2005)
necessary. They suggest estimating a series of nested models, advise this method based on the key arguments that (a) this
that is, freeing parameters step by step and comparing the approach does not require adding constructs to the model solely
overall model fit across steps. for identification purposes (which contributes to model
parsimony), and (b) measurement parameters are stable and
5.3.3. Model identification less sensitive to changes in structural parameters.
A major concern of formative measurement models is how to However, this model allows for different conceptual
establish statistical identification to enable their estimation. In interpretations (Jarvis et al., 2003), namely (a) a MIMIC
isolation, formatively-measured constructs as defined by Eq. (2) model (Jöreskog and Goldberger, 1975), (b) an endogenous
are underidentified (Bollen and Lennox, 1991; MacCallum and construct with two reflective indicators that is influenced by
Browne, 1993; Temme, 2006) and, thus, cannot be estimated. exogenous observed variables, or (c) a formatively-measured
This inability to estimate formative measurement models construct which influences indicators of another construct.
without the introduction of additional information (see below) MacKenzie et al. (2005) argue that the constellation resulting
has resulted in criticisms of the value of formative measurement from adding two reflective measures to the formative speci-
in general (see Howell et al., 2007, 2008-this issue). fication should not be interpreted as a MIMIC model but as a
As with reflective measurement models, two necessary but yet latent variable having a mixture of formative and reflective
not sufficient conditions have to be met for identifying models indicators (since both types of indicators belong to the same
including formatively-measured constructs (Bollen, 1989; Bollen concept domain and are content-valid operationalizations of the
and Davis, 1994; Cantallupi, 2002a,b; Edwards, 2001; Temme, same construct). In contrast, MacCallum and Browne (1993),
2006). First, the number of non-redundant elements in the Scholderer and Balderjahn (2006) and Temme (2006) explicitly
covariance-matrix of the observed variables needs to be greater equate models with mixed indicators and MIMIC models. It is
or equal the number of unknown parameter in the model (t-rule). outside the scope of this paper to discuss these interpretations in
Second, the latent construct needs to be scaled (scaling rule). For detail, but it should be stressed that despite the different possible
the latter condition, three main options are available (Bollen and interpretations at a conceptual level, there are no differences
Davis, 1994; MacCallum and Browne, 1993), namely (a) fixing a at the empirical level (the models yield the same parameter
path from a formative indicator to the construct, (b) fixing a path estimates).
from the formatively-measured construct to a reflectively-
measured endogenous latent variable, or (c) standardizing the
formatively-measured construct by fixing its variance to unity.
Edwards (2001) advises the last of the three options because
fixing path parameters precludes estimating standard errors of
theoretically interesting relationships. Note that the choice of
scaling method can affect substantive conclusions as the
significance of different relationships in the model with a
formatively-measured construct may vary depending of how the
scale of the latter is set (see Franke et al., 2008-this issue).
The t-rule and scaling rule are, however, not sufficient
conditions for identifying formative measurement models. In
this context, Bollen (1989) draws attention to the fact that the
formative measurement model needs to be placed within a
larger model that incorporates consequences (i.e., effects) of the
latent variable in question to enable its estimation. Specifically,
for identifying the disturbance term ζ at the construct level, the
formative latent variable needs to emit at least two paths to other
(reflective) constructs or indicators (MacCallum and Browne,
1993); literature also refers to this condition as 2+ emitted paths
rule (Bollen and Davis, 1994).
Literature discusses three approaches for applying the 2+
emitted paths rule, which are (a) adding two reflective indicators
to the formatively-measured construct, (b) adding two reflec-
tively-measured constructs as outcome variables, and (c) a mix- Fig. 4. Identification using a MIMIC model.
1214 A. Diamantopoulos et al. / Journal of Business Research 61 (2008) 1203–1218

Fig. 5. Identification with two reflectively-measured constructs.

5.3.3.2. Adding two reflective constructs. According to Bollen
and Davis (1994), another option of establishing model
identification is the specification of two structural relations from
the formative latent variable to two reflectively-measured
constructs (Fig. 5). While these two reflectively-measured
constructs need to be unrelated in models which only comprise
the focal formatively-measured construct and the two reflectively-
measured constructs (as in Fig. 5), the reflective constructs may be
causally related in larger models (Temme, 2006).
This model is justifiable in case that two reflectively-
measured constructs can be included in the nomological
network based on theoretical considerations. However, includ-
ing any reflectively-measured outcome variables purely for
identification reasons puts the theoretical model specification
into question if these outcomes are not of theoretical interest.
Note also that the choice of outcome constructs potentially
affects the interpretation of the formatively-measured construct
itself by influencing the estimates of γ-parameters (see Heise,
1972; Howell et al., 2007; and also Franke et al., 2008-this
issue). Indeed, as Bagozzi (2007, p. 236) observes, “the param-
eters regarding the observed variables to their purported
formative latent variable are functions of the number and nature
of endogenous latent variables and their measures”.
5.3.3.3. Adding one reflective indicator and one reflective
construct. This model is a mixture of the two previous
procedures and involves adding one reflective indicator to the
latent construct and linking the latter to a reflectively-measured
latent variable (Fig. 6). This mixed approach is applicable if the
theoretical model includes only one structural relationship of
the formatively-measured latent variable to a reflectively-
measured latent variable. In this case, including a reflective
indicator such as a global measure helps to overcome under-
identification and might simultaneously be used for validation
purposes (see Diamantopoulos and Winklhofer, 2001).
Temme (2006) demonstrates that the 2+ emitted paths rule is
a necessary but yet not necessarily sufficient condition for
identification when the two reflectively-measured outcome

Fig. 6. Identification with one reflective measure and one reflectively-measured construct.
 A. Diamantopoulos et al. / Journal of Business Research 61 (2008) 1203–1218
constructs are either directionally related (i.e., one directly
impacts on the other), or their disturbance terms are correlated.
These models require imposing further restrictions in order to
establish full model identification (such as fixing the covariance
of the disturbance terms to zero, or using a partially reduced
form model; for details, see Bollen and Davis, 1994;
Cantaluppi, 2002a,b; and Temme, 2006).
Finally, models which violate the 2+ emitted paths rule due to
containing formatively-measured constructs that emit only one
path can be identified by fixing the variance of the disturbance
term to zero (MacCallum and Browne, 1993). MacCallum and
Browne (1993) alert to applying this approach with caution as it
implies the theoretical assumption that the formative indicators
completely capture the construct. In other words, this approach
assumes that a census of indicators of the latent variable is
undertaken at the item generation stage, and, hence, no
unexplained variance exists. By fixing the disturbance term to
zero the formative construct becomes a weighted linear combina-
tion of its indicators without any surplus meaning (Diamantopou-
los, 2006; MacKenzie et al., 2005). Although there are examples
of constructs for which all possible indicators could be
conceivably specified (Diamantopoulos, 2006), in most cases
this assumption is not reasonable (Bollen and Davis, 1994) and
therefore setting the error term to zero is not justifiable.
Finally, like all formative measurement models, also the
three higher-order models in Fig. 2 are in isolation statistically
underidentified and cannot be estimated. Since a discussion of
necessary conditions for identifying higher-order models is
beyond the scope of this review, the reader is referred to Albers
and Götz (2006), Cantaluppi (2002a,b), Edwards (2001), Giere
et al. (2006), Jarvis et al. (2003), Temme (2006), and Williams
et al. (2003).
5.4. Reliability and validity assessment of formative models
5.4.1. Reliability assessment
As the correlations between formative indicators may be
positive, negative or zero (Bollen, 1984; Diamantopoulos and
Winklhofer 2001), reliability in an internal consistency sense is
not meaningful for formative indicators (Bagozzi, 1994; Hulland,
1999). As Nunally and Bernstein (1994) put it, “internal
consistency is of minimal importance because two variables
that might even be negatively correlated can both serve as
meaningful indicators of a construct”. Similarly, Bollen and
Lennox (1991) explicitly alert researchers not to rely on
correlation matrices for indicator selection as this might lead to
eliminating valid measures.
While Rossiter (2002, p. 388) condemns all sorts of
reliability assessments claiming that “for a formed attribute,
there is […] no question of unreliability” and several other
authors skip the issue of reliability assessment when discussing
formative measure development (e.g., Diamantopoulos and
Winklhofer, 2001; Eggert and Fassot, 2003), Bagozzi (1994)
and Diamantopoulos (2005) recommend reliability assessment
for formative indicators in form of test-retest reliability (see e.g.,
DeVellis, 2003; Spector, 1992). MacKenzie et al. (2005)
additionally propose using the correlation between formative
1215
indicators and an alternative measure assessing the focal
construct. What needs to be clarified, however, is how such a
correlation should be interpreted. Would a non-significant
correlation unambiguously mean that the focal measure lacks
reliability? What if the alternative measure is itself unreliable?
Does this approach actually test the reliability of the focal
measure or is it rather a test of convergent validity?
5.4.2. Validity assessment
One of the most controversial issues in formative measure-
ment literature is validity assessment. Some researchers argue
that no quantitative quality checks are usable for assessing the
appropriateness of formative indices (e.g., Homburg and
Klarmann, 2006). Others note that the applicability of statistical
procedures is limited as the choice of formative indicators
determines the conceptual meaning of the construct (Albers and
Hildebrandt, 2006). Rossiter (2002, p. 315) dismisses any
validity assessment for formative indicators claiming that “all
that is needed is a set of distinct components as decided by
expert judgment”. However, most researchers do not share the
above views. Edwards and Bagozzi (2000, p. 171), for example,
stress that “if measures are specified as formative, their validity
must still be established. It is bad practice to […] claim that
one's measures are formative, and do nothing more”.
5.4.2.1. Individual indicator validity. Bollen (1989) argues
that the γ-parameters, which reflect the impact of the formative
indicators on the latent construct (see Eq. (2)), indicate indicator
validity. The γ-parameters capture the contribution of the
individual indicator to the construct, therefore items with non-
significant γ-parameters should be considered for elimination as
they cannot represent valid indicators of the construct
(assuming that multicollinearity is not an issue). Diamantopou-
los and Winklhofer (2001) build upon Bollen's (1989) argument
and recommend using a MIMIC model due to simultaneously
allowing for the estimation of γ-parameters and for the
provision of an overall model fit (which is indicative of the
validity of formative indicators as a set).
An alternative (or additional) approach is assessing indicator
validity by estimating the indicators' correlations with an external
variable. For example, Diamantopoulos and Winklhofer (2001)
suggest including a global measure summarizing the essence of
the construct (see also Fayers et al., 1997). Assuming that the
overall measure is a valid criterion, the relationship between a
formative indicator and the overall measure indicates indicator
validity (Eggert and Fassot, 2003; MacKenzie et al., 2005).
Following this approach, indicators correlating highly with the
external variable are retained whereas those showing low or non-
significant relationships are candidates for elimination.
Lastly, a formative measurement model specification implies
that the latent variable completely mediates the effects of its
indicators on other (outcome) variables (see Figs. 4 and 5). This
implies certain proportionality constraints on the model
coefficients (Bollen and Davis, 1994; Hauser, 1973). If such
proportionality constraints do not hold for a particular indicator,
the validity of the latter is questionable (see Franke et al., 2008-
this issue).
1216 A. Diamantopoulos et al. / Journal of Business Research 61 (2008) 1203–1218
5.4.2.2. Construct validity. After examining validity at the
individual indicator level, the next step involves assessing
validity at the overall construct level. An important point in this
regard is that “causal indicators are not invalidated by low
internal consistency, so to assess validity we need to examine
other variables that are effects of the latent variable” (Bollen
and Lennox, 1991, p. 312, emphasis added). One common
approach is focusing on nomological (Jarvis et al., 2003;
MacKenzie et al., 2005; Reinartz et al., 2004) and criterion-
related (Diamantopoulos and Siguaw, 2006; Edwards, 2001;
Jarvis et al., 2003) validity.
MacKenzie et al. (2005) suggest proceeding as with reflective
scales, that is, estimating hypothesized relationships of the focal
construct with theoretically related constructs. These estimated
relationships should be consistent with the expected direction and
be significantly different from zero. Diamantopoulos and
Winklhofer (2001) also underline the importance of nomological
validation particularly in cases where indicators have been
purified. Rossiter (2002, p. 327) challenges the approach of
evaluating the validity of a formative index by relating it to other
constructs by arguing that “[a] scale's validity should be
established independently for the construct”. In response,
Diamantopoulos (2005) points out that, by definition, all forms
of validity — with the exception of face and content validity —
are defined in terms of relationships with other measures (see
Carmines and Zeller, 1979; Zeller and Carmines, 1980).
Concerning other types of validity assessments, Bagozzi
(1994, p. 338) states that “construct validity in terms of
convergent and discriminant validity [is] not meaningful when
indexes are formed as linear sums of measurement”. In contrast,
MacKenzie et al. (2005) suggest that standard procedures for
assessing discriminant validity are equally applicable to
formative indexes, which include testing (a) whether the focal
construct less than perfectly correlates with related constructs,
and/or (b) whether it shares less than half of its variance with
some other construct, that is, construct intercorrelation is less
than .71 (Fornell and Larcker, 1981).
Diamantopoulos (2006) proposes using the variance of the
error term as an indication of construct validity. Since the error
term captures aspects of the construct's domain that the set of
indicators neglect, the lower the variance of the error term, the
more valid the construct (see also Williams et al., 2003). If the
set of indicators is comprehensive in the sense that it includes all
important construct facets, the construct meaning is validly
captured; accordingly, the residual variance is likely to be small.
Finally, confirmatory tetrad analysis (CTA) (Bollen and
Ting, 1993, 2000; Eberl, 2006, Gudergan et al., 2008-this issue)
offers a basic test of construct validity. Although Bollen and
Ting (2000, p. 4) originally propose CTA as “an empirical test
of whether a causal or effect indicator specification is
appropriate”, interpreting evidence supporting the latter as
also supporting the construct's validity is reasonable.
6. Conclusion and future research
Building on a review of literature relating to the specifica-
tion, estimation, and validation of formative measurement
models, this article hopefully lends a helping hand to researchers
considering the adoption of formative measurement in their
empirical efforts, while, at the same time, encouraging a critical
perspective in the application of formative indicators.
Concerning future research, one major issue concerns the
conceptual plausibility of formatively-measured constructs
occupying endogenous positions in structural models. While a
number of studies incorporate formative latent variables in such
positions (e.g., Edwards, 2001; Jarvis et al., 2003; MacKenzie
et al., 2005), Wiley (2005, p. 124, emphasis in original) notes
that there is “no mechanism by which an antecedent variable
can influence a formative index”. Since the set of causal
indicators and the disturbance term jointly account for the total
variation of a formatively-measured construct, the specification
of an additional source of variation (i.e., an antecedent con-
struct) is conceptually questionable. Given the conceptual and
practical importance of this issue, a debate on the use of
formatively-measured constructs as endogenous variables is
urgently required.
Another issue for future research concerns modeling forma-
tively-measured constructs as moderator variables in structural
models. Although literature provides empirical examples of
employing formatively specified moderators (e.g., Reinartz et al.,
2004), more research using formatively-measured constructs
when forming interaction terms is needed.
Finally, there is a debate on whether formative measurement
is really necessary, that is, whether it should be used in the first
place. Bagozzi (2007, p. 236), for example, states that, for-
mative measurement can be done but only for a limited range of
cases and under restrictive assumptions”, while Howell et al.
(2007, p. 216; see also Howell et al., 2008-this issue) argue that
“formative measurement is not an equally attractive alternative
[to reflective measurement]”. Although there are those (includ-
ing the authors and Bollen, 2007) who feel that, despite its
various shortcomings, formative measurement is indeed a
viable alternative to reflective measurement based on con-
ceptual grounds, further theoretical and methodological
research is necessary to finally settle this debate. Time will tell.
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