The product indicator approach involves multiplying each indicator of the exogenous latent variable with each indicator of the moderator variable (Chin, Marcolin, & Newsted, 2003). Hence, the product indicators become the indicators of the interaction term.

When to use?

If all constructs are reflective then a product indicator approach is the best.

The indicator multiplication builds on the assumption that the indicators of the exogenous construct and the moderator each stem from a certain construct domain and are in principle interchangeable.

This approach is not applicable when the exogenous construct and/or the moderator are measured formatively. Since formative indicators do not have to correspond to a predefined theoretical concept, multiplying them with another set of indicators will confound the conceptual domain of the interaction term.

Exercise

Exercise 1: Single Moderator

Download the dataset here and draw the following model.

Exercise 2: Multiple Moderator

Download a project here.