The Performance-Based Funding Scheme of Universities
The Performance-Based Funding Scheme of Universities

Summary/Abstract: The purpose of this study is to analyse the effectiveness of the performancebasedfunding scheme of the Finnish universities that was adopted at the beginning of2013. The political decision-makers expect that the funding scheme will createincentives for the universities to improve performance, but these funding schemes havelargely failed in many other countries, primarily because public funding is only a smallshare of the total funding of universities. This study is interesting because Finnishuniversities have no tuition fees, unlike in many other countries, and the state allocatesfunding based on the objectives achieved. The empirical evidence of the graduationrates indicates that graduation rates increased when a new scheme was adopted,especially among male students, who have more room for improvement than femalestudents. The new performance-based funding scheme allocates the funding accordingto the output-based indicators and limits the scope of strategic planning and theautonomy of the university. The performance-based funding scheme is transformed tothe strategy map of the balanced scorecard. The new funding scheme steers universitiesin many respects but leaves the research and teaching skills to the discretion of theuniversities. The new scheme has also diminished the importance of the performanceagreements between the university and the Ministry. The scheme increases theincentives for universities to improve the processes and structures in order to attain asmuch public funding as possible. It is optimal for the central administration of theuniversity to allocate resources to faculties and other organisational units followingthe criteria of the performance-based funding scheme. The new funding scheme hasmade the universities compete with each other, because the total funding to theuniversities is allocated to each university according to the funding scheme. There is atendency that the funding schemes are occasionally improved. The findings of this studyare useful for those who wish to modify the funding scheme in the future.

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