Institutional impact of performance-based funding in Finnish higher education: Changes and effects on institutional behaviour

Abstract

Performance-based funding (PBF) is widely adopted across European countries and has also been implemented in the Finnish higher education sector, with the first elements of performance measurement introduced in the 1990s. Similar to other Nordic countries, Finland faces challenges related to the financial, political, social, and sustainability aspects of its welfare model, which have triggered government-led reforms and initiatives within the scope of New Public Management (NPM), significantly impacting the higher education sector. In the heavily publicly financed higher education system characterised by ambitious objectives, funding remains a central challenge. Delivering more with less resources is increasingly important, particularly considering national ambitions and demographic trends. Although Finnish higher education institutions hold significant autonomy in international comparison, their heavy reliance on public funding directly impacts their actual autonomy. Furthermore, the funding models for higher education institutions has become an instrument of public authority steering. Investigating the effects of funding models is particularly interesting in the Finnish context, which has one of the most performance-oriented systems globally with a strong emphasis on outputs. Unlike many European universities, a fixed budget is not allocated to Finnish universities. Instead, they obtain public funding based on competition and the relatively unique approach within the Finnish context contributes to an interesting research environment. While the popularity and attention directed towards PBF in Europe is high and an extensive body of literature exists on various topics related to it, there is limited research on its impact on institutional performance and behaviour. Hence, this article aims to explore the diverse effects of the funding models, as identified in prior research, on institutions and their behaviour. According to the reviewed literature, PBF significantly impacts institutional behaviour in various areas, such as research and publication patterns. The funding schemes and indicators clearly communicate expectations to the higher education sector through direct financial incentives and as a result, institutions adjust their behaviour to maximise funding opportunities. A recent OECD evaluation questioned whether Finland truly needs to focus so heavily on outputs in its funding model. This aligns with the findings and challenges discussed in this article.