Most empirical balanced scorecard (BSC) studies have shown a tendency to wrongly employ reflective indicators instead of the more theoretically suitable formative indicators. However, formative indicators are difficult to apply due to the lack of statistical software support and a standardized model testing method. The paper aims to discuss these issues.
This study empirically compares the reflective and formative measurement method with standardized model comparison criteria. After collecting 217 valid questionnaires from companies in South Korea, the authors applied a structural equation modeling technique to analyze the data.
The result shows that the formative measure provides greater validity for the corporate performance measurement using BSC. Further, this study shows the indicators’ relative influence on each BSC perspectives using the formative measure.
This study proved the usefulness of the formative measure analysis method and suggested its practical use, focusing on the indicators most useful in developing corporate strategies. In addition, the authors showed that formative indicators could be used in the corporate environment by overcoming the limitations of conventional studies that were confined to causal relationships with latent variables.
This study may be the pioneering work that compares formative and reflective indicators simultaneously, addressing the usefulness of formative measurement and its application validity in the existing empirical studies using reflective measurements.
