Creación de una instancia regional de competencia

Empirical research on income diversification in higher education is sparse, so this review firstly considers and synthesises the key narrative debates in the theoretical and empirical literature and before examining the various empirical findings.

In reviewing the selected theoretical and empirical papers on income diversification, some broad debates emerge. The overarching theme in the discourse is that these are financially challenging times for higher education (Kwiek, 2017). Considering the literature spans some 30 years, it appears it has been ever thus for the sector and will likely continue. From the earliest reference in a higher education context by Chabotar (1989) to the most recent in Koryakina (2018); income diversification is seen as a necessary response to help mitigate the risks associated with dependence on any one source of income in challenging financial environments. The available literature on income diversification in higher education positions the following concepts.

2.7.1 Universities are actively diversifying their income

The realisation that the sector is keenly sensitive to external factors has led universities to realise the value of a diversified income portfolio (Webb, 2015). The dual pressures of rising demand and financial stringency mean that sources of funding for higher education are increasingly diversified (Zhao, 2001). As Taylor (2013) contends, in this harsh environment, good financial management includes the need to develop a diversified income base. Various studies confirm that higher education institutions around the world are pursuing a strategy of income diversification (Zhao, 2001; Stewart, 2008; Shattock, 2009; De Dominicis et al., 2011; Estermann & Pruvot, 2011; Webb, 2015).

2.7.2 The sources of income for publicly-funded higher education institutions

Writing in 2009, Shattock suggested in broad terms, most publicly funded institutions in Europe receive their income via three main sources; regular core income from government for teaching and basic research; additional research funds from public sources that are often earned on a competitive basis and finally, third-stream income that represents income earned on a quasi-commercial basis for example; contract research, professional development programmes and use of university facilities. However, over time this categorisation is clearly lacking recognition of the increasing importance of student contributions. Accordingly, in

their large scale European study, Estermann and Pruvot (2011) highlight the following broad categories of income; a) public funding (both block grants for teaching and research and competitively earned funding for research), b) private funding through student financial contributions (tuition fees and administrative expenses), and finally, c) other private funding (for research and education-related contracts, philanthropic donations, consultancy, hiring of facilities etc.). This appears a reasonable approximation to current funding arrangements and is confirmed by Jongbloed and Vossensteyn (2016) in their comparison of funding across OECD countries. Figure 2.1 adapts their schematic to encompass the UK position.

Figure 2.1: Funding channels for a higher education institution. Adapted from Jongbloed and Vossensteyn (2016).

In terms of the activities engaged in to generate additional income or third-stream income, most oft-cited in this regard are Hearn’s (2003) eight domains of revenue-seeking efforts as summarised in table 2.1.

Table 2.1: Hearn’s Eight Domains of Revenue-seeking Efforts

Domain Example

Instruction: including online programming and niche-oriented non- degree programming.

Research and analysis: including technology-transfer initiatives, business incubators, and e-commerce initiatives.

Pricing: including differentiated pricing and user fees. Financial decision making

and management:

including venture capital investment, as well as participation in arbitrage and options markets.

Human resources: including compensation incentives for entrepreneurship and retirement/rehiring incentives for faculty.

Franchising, licensing, sponsorship, and partnering arrangements with third parties:

including logo-bearing clothing, tours and camps, and event sponsorships.

Auxiliary enterprises, facilities, and real estate:

including on-campus debit cards, facility rentals, and alumni services.

Development: including appeals to donors abroad and other efforts. Source: Hearn (2003, p.iii)

It is helpful to note, the term third-stream income is often used to encompass all income generating activity that is peripheral to the core activities of teaching and research in academic environments and contexts (Molas-Gallart & Castro-Martínez, 2007; Shattock, 2010; Koryakina, Sarrico, & Teixeira, 2015).

2.7.3 The perceived drivers for income diversification

The recurrent themes suggesting a stimulus for pursuing a strategy of income diversification include; reducing public funding, rising costs, greater competition and the perceived risk of dependence.

Johnstone’s (2002) contention that demand is rising faster than government’s ability to pay for it is often cited in the income diversification literature (Stewart, 2008; Shattock, 2009; Namalefe, 2014; Feleke, 2015). Exacerbated by current global economic challenges and increasing demands on the state (Liu, 2007; Teixeira et al., 2014), public funding as a proportion of income for higher education institutions is declining and this is cause for

concern (De Zilwa, 2005; Pilbeam, 2006; Liu, 2007; Rozmus & Cyran, 2012; Webb, 2015). As McCaffery opines:

The traditional and staple source of funding for HEIs i.e. government is no longer either reliable or munificent. On the contrary, mainline institutional support from the government, as a share of the total budget, has declined virtually everywhere. Not only that, the emergence of ‘contractual’ government has robbed universities of the ability to plan for the long term with any degree of confidence. (2010)

Compounding the issue, costs are rising as the established sources of income are diminishing, consequently costs outpace the available revenue (De Zilwa, 2005; Alstete, 2014; Feleke, 2015). Rising per-student costs are magnified by pressure to expand enrolment (Johnstone, 2002). As Estermann and Pruvot contend “costs are rising due to massification, growing demand, additional and tougher accountability requirements, new societal demands on institutions and the rising costs of human resources (pensions, etc)” (2011, p. 16). An emerging theme in the discourse is that students have higher expectations, so it costs more to compete for them. Increasing competition and benchmarking has caused many European institutions to pour money into expanding research capability and the qualifications of their staff, this has driven up costs (Alstete, 2014; Teixeira et al., 2014). The competition for students and their tuition fees is growing internationally as many universities now compete in global markets (Pilbeam, 2006; Besana & Esposito, 2015; Koryakina et al., 2015). In addition, some of the government funding is now on a competitive basis, putting universities in competition with each other (De Dominicis et al., 2011; Estermann & Pruvot, 2011; Stachowiak-Kudła & Kudła, 2017). Overall, increased competition between universities cause them to look for as many funding sources as possible (Prince, 2007; Rozmus & Cyran, 2012). Besana and Esposito (2015) note, these competitive pressures even extend to fundraising.

The need to reduce dependence on diminishing public funding is the primary driver for income diversification in the available literature (Johnstone, 2002; Liu, 2007; Rozmus & Cyran, 2012; Teixeira et al., 2014). Prophetically writing in 1992, Albrecht and Ziderman comment “Resources at institutions should be more diverse. Minimizing dependence on any one source reduces potential shocks of eventual changes in available public resources” (1992, p. 54).

Thus, the dominant narrative reflects that institutions are diversifying away from public funding to improve financial viability by generating revenues from non-governmental

sources (Feleke, 2015; Chirica & Puscas, 2018). As Shattock confirms “Financial stability is an important component in achieving academic success, but this can only be attained in the modern period from a diversified funding base in which the state does not provide the major proportion of the income” (2010, p.195).

Universities turn to income diversification to make up shortfalls in their funding caused by declining public monies (McCaffery, 2010; Shattock, 2010; Teixeira & Koryakina, 2013; Koryakina, 2018). In the US, declining public funding is countered by universities raising their tuition fees, although there is a limit to what the market will bear and so institutions seek additional revenues to supplement these reductions (Hearn, 2003; Alstete, 2014; Webb, 2015).

Finally, institutions diversify their income to be more adaptable; being less dependent on declining public funds can lead an institution to be more able to adapt to changes in its external environment (De Dominicis et al., 2011; Abankina, Vynaryk, & Filatova, 2017). The rise of performance-based funding has also prompted universities to seek alternatives with fewer strings attached (Shattock, 2010).

This slightly myopic view in the literature that income diversification is all about reducing dependence on public funding presents a developing gap in the discourse as it lacks contemporary relevance in some jurisdictions. Only Webb (2015) considers the risk of being overly dependent on tuition fees, but his study is on private, non-publicly funded institutions so public-funding declining or otherwise is not central to the argument.

There does, however, appear to be consensus of the importance of a more balanced income portfolio and to not be too dependent on any one source of income, whatever it may be (De Zilwa, 2005; De Dominicis et al., 2011; Webb, 2015).

2.7.4 The outcomes that are sought from a strategy of income diversification

In reviewing the narrative, the anticipated outcomes sought are to reduce exposure to financial risk, to improve autonomy, and to remain competitive.

In their comprehensive study of 100 higher education institutions across 27 countries, Estermann and Pruvot find that:

Risk management constitutes a major driver for income diversification for universities in Europe. The perception that it is necessary to spread financial risks is commonly shared among universities, especially in the light of the consequences of the economic

crisis and on the basis of pessimistic expectations regarding future trends in funding coming from ‘traditional’ sources. (2011, p. 11)

The risks to mitigate are perceived as the need to reduce financial vulnerability caused by dependence on any one source of income (Estermann & Pruvot, 2011; Feleke, 2015; Webb, 2015) or exposure to market forces and fluctuations in student recruitment (Chabotar, 1989; De Zilwa, 2005). Income diversification is also seen as a way of improving stability in the finances of an institution (Besana & Esposito, 2015; Webb, 2015; Stachowiak-Kudła & Kudła, 2017; Chirica & Puscas, 2018) and mitigating fluctuations generally (Eastman, 2006; Namalefe, 2014). More generally, income diversification is seen as a strategy to enhance financial health and sustainability (Cheslock, 2006; Stewart, 2008; Estermann & Pruvot, 2011; Feleke, 2015; Irvine & Ryan, 2019).

In The Higher Education Handbook, McCaffery (2010) cites Babbidge and Rozenweig (1962) to reinforce that “a workable twentieth-century definition of institutional autonomy [is] the absence of dependence upon a single or narrow base of support” (p.65). Thus, universities are also driven to diversify their income as a way to enhance or preserve their autonomy (Pilbeam, 2006; Estermann & Pruvot, 2011; Chirica & Puscas, 2018), and to generate discretionary revenues that have less strings attached as noted earlier. Estermann and Pruvot (2011) also find another motivation is to avoid the administrative burden often associated with securing public funding. Commercial activities or fundraising are perceived as being easier to manage and the resulting funds allocated without restrictions.

In his seminal work Entrepreneurial Universities: Organizational Pathways to Transformation, Clark (1998) positions a diversified funding base as one of the requirements for transformation and closely links it to the benefits of institutional autonomy, “the entrepreneurial response offers a formula for institutional development that puts autonomy on a self-defined basis: diversify income to increase financial resources, provide discretionary money and reduce government dependency” (p.146).

Note however these narratives are still closely linked to the declining public funding debate. Finally, the shifting competitive landscape is seen as forcing institutions to pursue additional income streams to be able to remain competitive (Hearn, 2003; De Zilwa, 2005; Teixeira & Koryakina, 2013). According to Estermann and Pruvot “Income diversification may be strategically used to develop activities and respond to new missions, as it may reinforce the

position of an institution on the local, national or international stage by supporting its competitiveness” (2011, p. 10).

2.7.5 The criticisms or limitations of income diversification

The concerns around pursuing a strategy of income diversification in the literature are varied, the predominant debate is the potential negative distraction from core mission and damage to academic integrity and teaching quality (Zhao, 2001; Johnstone, 2002; Liu, 2007; Namalefe, 2014; Koryakina, 2018). The potentially negative effects of pursuing additional income streams are most prominently discussed in two influential books Slaughter & Leslie (1997) Academic Capitalism and Bok (2003) Universities in the Marketplace, both these seminal works are heavily cited in the studies noted previously.

A strategy of income diversification can also lead to internal tensions within the academy; those faculties with more obvious links to commercial opportunities for income may secure more discretionary funds than those who do not (Johnstone, 2002; Liu, 2007). Drawing on resource dependence theory, Namalefe (2014) observed this may even lead to a perceived power imbalance.

In financial contexts, the debate centres around the likely effectiveness of such a strategy and its limitations (Ziderman & Albrecht, 1995). Whilst recognising that income diversification is an important part of good financial management, Taylor (2013) observes its ability to have a meaningful effect may be limited given the scale of teaching income as a proportion of total income.

Income diversification is recognised as not being a short-term answer (Prince, 2007). As Stewart (2008 p.vi) notes, “There is no easy panacea to the income/cost divergence that the HE sector faces”. Moreover, a strategy of income diversification can generate additional costs (Ziderman & Albrecht, 1995; Liu, 2007); thus, institutions need to be mindful of the need to generate net returns, not just income (Hearn, 2003; Shattock, 2010; Taylor, 2013). As universities fees are often regulated and set by government, generating increased external profitable income streams will require new skills and consideration around optimal pricing of activities, this more commercial orientation may be lacking (Morgan & Prowle, 2005). A common focus for income diversification is on building up research capabilities, this brings with it the need for substantial investment (Pilbeam, 2006; Teixeira et al., 2014).

Although, whilst research tends to require cross-subsidy in the short-term, it can pay reputational dividends in the long-term (Jenkins & Wolf, 2016).

With the caveat of these concerns and limitations, income diversification remains an important and necessary strategy (Johnstone, 2002; Shattock, 2010; Estermann & Pruvot, 2011; Taylor, 2013; Koryakina, 2018). And yet, as the literature notes that some universities appear more able to succeed in diversifying their income streams than others (Estermann & Pruvot, 2014).

2.7.6 Not all universities are equally able to succeed in diversifying their income

As noted previously, in the face of reducing public funding, risings costs, and a more competitive landscape, universities are actively pursuing a strategy of income diversification with the aim of reducing risk, improving autonomy and remaining competitive. However, one of the dominant themes in the available literature is that, whether due to institutional or national limitations, not all universities are equally able to succeed in diversifying their funding base (Johnstone, 2002; De Zilwa, 2005; Pilbeam, 2006; Prince, 2007; Shattock, 2009; Ali, Bhattacharyya, & Olejniczak, 2010; Estermann & Pruvot, 2011; Teixeira & Koryakina, 2013; Teixeira et al., 2014). As the following sections highlight, this has the potential to create inequalities in exposure to financial risk, thus empirically testing the antecedent factors that explain the variation is of theoretical and practical importance. The following sections critically analyse and synthesise the available literature to present what is empirically known about the outcomes of a strategy of income diversification and also how is it known.

2.8 What are the empirical findings for income diversification in higher education?

The previous section has focused on the broad debates in the literature. In this section, the findings of the empirical studies are critically reviewed.

The results of the search for relevant literature produced 18 empirical studies relating to income diversification in the higher education sector. These studies present a variety of focal questions and therefore findings, but only four present an outcome related to financial health. For deeper consideration of the financial outcomes of a strategy of income diversification,

this review of the literature also extends into the non-profit management literature, selecting studies where educational institutions were represented in the sample.

2.8.1 Financial outcomes

Despite the strength of the narrative for the need to diversify income and reduce dependence, studies on the financial outcomes of income diversification are meagre. Only four were focused on establishing the financial outcome; firstly Stewart (2008) finds that state-funded US institutions are more financially diversified than their UK counterparts and is hence suggested by logic to have a more balanced income portfolio and a reduced dependence on public funding. Secondly, according to Besana and Esposito (2015), US not-for-profit higher education institutions that are identified as being more financially diversified, achieve greater income gains and better financial solvency. In private US institutions, Webb (2015) finds an interesting relationship that as university or college revenues becomes more diversified, the total revenue per full-time-equivalent student increases and so does the financial health of the institution. More recently, in their study assessing the financial health of Australian universities, Irvine and Ryan (2019) find income diversification to be a strong predictor of financial viability.

However, to assess in more depth the degree to which income diversification lessens financial vulnerability and improves stability, it is necessary to turn to the non-profit management literature which is more developed in this regard. As Chikoto, Ling and Neely contend “the topic of revenue diversification or its inverse, revenue concentration, has been and continues to be of keen interest to the study of nonprofit organizations’ financial environments” (2016, p. 1428). As stated previously, the two sectors operate in trust markets and are motivated by more idealistic goals than the traditional business sector (Webb, 2015). Moreover, the relevance to higher education can be exemplified by the similarities in the challenges facing the two sectors. Common themes include issues of vulnerability and reduced autonomy caused by overdependence on reducing government funding thus the need to seek multiple sources of income, balanced against concerns of distraction from core mission (Mitchell, 2014).

In the non-profit literature income diversification is positioned as a risk reduction strategy (Chikoto et al., 2016). The key debate in the literature centres around a) how financially diversified non-profit organisations are, and b) does revenue diversification or revenue concentration better help their financial position? Taking a chronological approach, this

section reviews some of the more prominent studies that include educational institutions in their sample (this does though, encompass all institutions from pre-school to higher education).

In their seminal 1991 paper, Tuckman and Chang develop a methodology for measuring the financial vulnerability of non-profit organisations (1,080 educational institutions representing 23% of the sample). The degree to which their income is diversified (or concentrated) comprises one of the four criteria for vulnerability in the methodology. The theory being that a non-profit is more vulnerable if their sources of income are limited than if they are multiple. As Tuckman and Chang state:

This is because a shock is more likely to affect one revenue source than it is to affect all sources at once. The larger the number of revenue sources a nonprofit has and the more equally divided its share of revenues from each source is, the less vulnerable it tends to be. (1991, p. 452)

The authors further argue that a decline in one source may be offset by an increase in another and the more sources of income in the portfolio, the more opportunity for this balancing effect to occur. Tuckman and Chang measure income diversification/concentration using a measure based on the Herfindahl Index used in economics to measure market concentration. For each non-profit organisation, the square of the percentage share that each income source represents to total income is summed to produce an index score. This creates a measure that captures both the number of income sources and the degree of income dispersion. This Herfindahl-based approach has been adopted by all subsequent studies looking at income