The impact of performance funding on institutional performance over time: evidence from South Korean universities

Abstract

Performance funding for higher education has gained popularity in many countries, but its impact on institutional performance remains unclear. This study investigates the impact of performance funding on the institutional performance of Korean universities over time. The institutional performance indicators used include graduates’ employment rate, student retention rate, financial aid per student, expenditure per student, and faculty-to-student ratio. Using longitudinal data of 160 4-year universities from 2008 to 2013, we employed a multilevel growth modeling strategy. The results indicate that institutions with more funding through the Education Capacity Enhancement Program sustained higher employment rate, retention rate, and faculty-to-student ratio in 2013, while employment and retention rates of less-funded institutions grew faster over time after controlling for 2008 status and institutional characteristics. This evidence demonstrates that the performance funding program in Korea encouraged institutions to focus on the most important performance indicators, resulting in a funding effect and a motivational effect. We suggest policy implications for the future development of performance funding as well as appropriate use of performance indicators.