The Performance-Based Funding Scheme of Universities

Management Dynamics in the Knowledge Economy, Vol.4 (2016) no.1, pp.109-124

Posted: 12 Apr 2016

See all articles by Juha Kettunen

Juha Kettunen

Turku University of Applied Sciences

Date Written: April 11, 2016


The purpose of this study is to analyse the effectiveness of the performance-based funding scheme of the Finnish universities that was adopted at the beginning of 2013. The political decision-makers expect that the funding scheme will create incentives for the universities to improve performance, but these funding schemes have largely failed in many other countries, primarily because public funding is only a small share of the total funding of universities. This study is interesting because Finnish universities have no tuition fees, unlike in many other countries, and the state allocates funding based on the objectives achieved. The empirical evidence of the graduation rates indicates that graduation rates increased when a new scheme was adopted, especially among male students, who have more room for improvement than female students. The new performance-based funding scheme allocates the funding according to the output-based indicators and limits the scope of strategic planning and the autonomy of the university. The performance-based funding scheme is transformed to the strategy map of the balanced scorecard. The new funding scheme steers universities in many respects but leaves the research and teaching skills to the discretion of the universities. The new scheme has also diminished the importance of the performance agreements between the university and the Ministry. The scheme increases the incentives for universities to improve the processes and structures in order to attain as much public funding as possible. It is optimal for the central administration of the university to allocate resources to faculties and other organisational units following the criteria of the performance-based funding scheme. The new funding scheme has made the universities compete with each other, because the total funding to the universities is allocated to each university according to the funding scheme. There is a tendency that the funding schemes are occasionally improved. The findings of this study are useful for those who wish to modify the funding scheme in the future.

Keywords: Financing, funding scheme, incentives, performance, university, higher education

JEL Classification: I22, I28

Suggested Citation

Kettunen, Juha, The Performance-Based Funding Scheme of Universities (April 11, 2016). Management Dynamics in the Knowledge Economy, Vol.4 (2016) no.1, pp.109-124, Available at SSRN:

Juha Kettunen (Contact Author)

Turku University of Applied Sciences ( email )

Lemminkäisenkatu 30
20520 Turku

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