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A Method for Reduction of Categorical Variables Based on a Concept of Pseudo-Correlation Coefficient

In this paper, we propose a simple method to reduce categorical variables into smaller, but significant numbers, and also demonstrate how the proposed method can be applied to the problem of reduction that empirical research often faces in the course of data processing. For the purpose, we introduce a concept of pseudo-correlation coefficient to make it possible to use factor analysis (FA) as a tool for reducing variables. The main idea of the concept is to deal with the measures of association of categorical variables in the sense of the concept of Pearson's correlation coefficient in order to meet the input requirement of FA. Upon examination of existing measures that could play as pseudo-correlation coefficients, Cramer's V coefficient is selected for the best result among them. To show the detailed procedure of the proposed method, a specific demonstration with the data from 329 R&D projects conducted in 18 private laboratories in electric and electronics industry is presented.