2.1 Recent shifts in university funding in Germany
Similar to other Western countries, (West) Germany experienced a wave of founding events of new universities in the 1960s–70s. The establishment of new universities was part of a large-scale expansion of higher education motivated by expected future shortages of highly skilled workers (Picht
1964; Ellwein
1985). At the same time, the newly established universities had a regional development mission to accomplish. They were mostly located in disadvantaged regions facing economic hardships due to their geographic location (e. g., Kassel, which was situated close to the border to socialist East Germany), sparsely settled regional environment (e. g., Regensburg in eastern Bavaria) and/or challenges from structural change in declining industrial centers (e. g., Bochum and Duisburg in the Ruhr area, but also Augsburg or Wuppertal). Policy makers were quite explicit about their hopes that the new universities would help boost the economic development of the surrounding regions.
Following another wave of restructuring and establishment of new universities after German reunification (Mayntz
1994), the structure of funds for the German universities (almost all of which are public) has substantially changed in the past decades. Between 1995 and 2010, the share of third-party funds (also known as program funding), relative to institutional funding (block grants) and universities’ own income, increased by about 70% (from 8.4 to 14.3%; Destatis
2013)
2. Similarly, between 1995 and 2010 the share of third-party funds among the
research expenditures of German universities jumped from 29 to 47% (Winterhager
2015). This shift is significant because institutional and third-party funds follow different rationales. Institutional funding is primarily allocated according to the educational services that a university provides. It varies strongly with the number of enrolled students, and differences across universities of similar size and disciplinary profile tend to be relatively minor. In contrast, third-party funding is provided by public or private bodies for specific activities in research, teaching or training of junior researchers and mostly on a competitive basis.
3 Its allocation to individual universities is highly contingent on the universities’ research profiles, as well as their past research performance and reputation. As a consequence, third-party funds may be distributed more unevenly across universities and, by extension, regions.
In parallel with the increased role of third-party funds, Germany has witnessed an increasing focus on academic excellence in the allocation of public funds for university research. Compared to countries such as the U. S. or the U. K., German universities have historically been relatively homogenous in terms of educational offerings, student body composition, research quality and institutional reputation (Hüther and Krücken
2016). Outright competition between schools was eschewed, as concentration of research prowess at individual schools was considered an undesirable hazard to the constitutional principle of equalizing the standards of living across German regions. (The same principle had also provided an impetus for starting new universities in the 1960s–1970s, as discussed above).
All this began to change in the late 1990s when policy makers increasingly focused on the competitive character of public research. The starting point of this change is typically attributed to the
BioRegio contest launched by the Federal Ministry of Education and Research (BMBF) in 1997 (Eickelpasch and Fritsch
2005; Dohse
2007). BioRegio’s objective was to enhance the global competitiveness of the German biotechnology research and industry. Regional collaborative projects with partners from universities, non-university public research organizations (PROs) and industry were eligible for funding, and the best proposals were selected by an international jury. Later BMBF programs used a similar basic design.
Subsequently the same approach of further strengthening the already leading players was also adopted in university funding (Kehm
2006). This shift is epitomized by the
Exzellenzinitiative, a joint initiative by the Federal government and the
Länder in which about € 4.6 billion of additional funding (about 4% of the overall research funding of German universities) were provided over the twelve-year period from 2006 to 2017 (Imboden et al.
2016). Even though the
Exzellenzinitiative eventually turned out to be less radical than initial plans to establish a few “elite universities” in Germany, the funding it provided was still highly “chunky”. Three lines of support were distinguished: integrated university-level development concepts (
Zukunftskonzepte), clusters of excellence and graduate schools. It is noteworthy that the winning universities were unevenly distributed in space. Among the 14 schools with supported development concepts, five were located in southern Baden-Wuerttemberg, two each in neighboring Bavaria, in Berlin and in North-Rhine Westphalia; as well as one each in Bremen, Lower Saxony and Saxony. Aggregating all lines of funding, individual funding per (successful) university varied from less than € 10 million to more than € 350 million (DFG
2015). Additional funds could amount to as much as 14% of the overall budget of successful schools (Imboden et al.
2016).
The
Exzellenzinitiative is only the most extreme and most visible example of a broader shift toward large-scale merit-based funding. Further adding to the potential of regional disparities is the DFG’s increasing focus on large-scale programs such as
Sonderforschungsbereiche, research groups and graduate schools, while funding of smaller projects that individual researchers can apply for has lost in relative importance.
4 Individual
Länder such as Hessen and Saxony have moreover emulated the
Exzellenzinitiative in smaller-scale regional programs.
2.2 Why are the regional effects of universities affected by disparities in research funding?
It might be suspected that increasing regional disparities in university funding are a relevant concern only for researchers and managers of “losing” universities. However, a sizeable literature shows that universities tend to have substantial economic effects on their host regions (for a review cf., e. g., Drucker and Goldstein
2007). To the extent that these effects depend on the research prowess of the respective universities, more pronounced inequality and a shifting regional balance in research funding are likely to induce shifts in the economic development of the universities’ home regions as well. The increased emphasis on excellence in the funding of German universities may then have substantial repercussions on regional economic disparities. In a long-term perspective, effects of the policy shift may be even stronger as public research and private-sector activities are mutually reinforcing through co-evolutionary processes at the regional level (Blankenberg and Buenstorf
2016). Multiple potential conduits of the economic effects of universities have been identified, and a rich empirical literature has explored these pathways. In the following, we briefly discuss the most important conduits, as well as how they may be affected by shifts in universities’ research funding.
When the German university system was expanded in the 1960s/1970s, both “demand side” and “supply side” effects on universities’ home regions were expected. “Demand side effects” derive from the regional expenditures made by the university, its employees and students, as well as from multiplier effects. A number of regional case studies have explored the relevance of demand-side effects. They typically report effects of substantial magnitudes (cf., e. g., Beckenbach et al.
2011). It is less clear to what extent demand-side effects depend on the research funding of the respective university. At least in the short run universities’ research activities probably generate less regional demand than teaching, which brings consuming students to the region. Long-run effects of research may be more pronounced and diverse, e. g., if better research (or higher reputation) helps universities attract more students and firms, including startups, to the university region.
The “supply-side” effects of universities are multifaceted. Traditionally, the focus of attention has been on the educational role of universities. To a substantial extent, the expansion of the German university system in the 1960s–70s was based on the objective to enhance the supply of human capital—taking the form of highly skilled university graduates—in the respective regions. Consistent with this expectation, Schubert and Kroll (
2014) find that the supply of graduates is associated with higher regional growth. For a more detailed analysis of how relevant regional disparities in university funding are for the supply of human capital to the university’s home region, the mobility of graduates has to be taken into account.
A rich literature has studied mobility decisions of graduates in various countries. Some idiosyncratic patterns have been observed. For instance, in the U.S. some Midwestern states are notorious for their loss of graduates to other, notably coastal, U. S. regions (Stephan
2012), whereas London is important as an “escalator” for graduates in the U. K. (Faggian and McCann
2009). In the German context, Buenstorf et al. (
2016) show that economic as well as social factors affect the propensity of graduates to start work in their university regions. Universities located in larger cities tend to retain more graduates, who moreover exhibit a preference for regions that are similar to where they grew up in terms of culture and urbanity. A stylized fact in this literature is that those who studied outside their home regions are most likely to also move upon graduation. In turn, this suggests that attractive universities allowing students to study in their home region may also help increase the supply of human capital in that region, because if they study elsewhere they may be less likely to return home afterwards. Overall, in the sample of Buenstorf et al. (
2016), about 43% of all graduates take up employment in the region where they graduated.
Much less is known about how strongly the choices of students depend on the research quality of universities. In the German case, university rankings have traditionally not played a big role in these choices, but this may change with the increasing public awareness of differences in institutional reputation. To the extent that there are (perceived) complementarities between research and teaching activities, universities that excel in research may be likely to attract more, and better, students. They will also provide better educated graduates to the respective region. This should be particularly relevant at the level of post-graduate studies. Based on these considerations, it seems plausible that increasing regional disparities in research funding may also increase regional disparities in the quantity and quality of university graduates. This effect will be stronger, the higher the mobility of incoming students and graduates, and the stronger the ties between research and teaching activities are.
In addition to university-related expenditures and the production of graduates, universities also affect their regional environment through the outcomes of their research activities, which suggests a direct channel through which changed prerogatives in research funding have repercussions at the regional level. This second type of “supply-side” effects has received increased attention in recent years. Following the seminal work by Jaffe (
1989), numerous empirical studies have shown that universities’ research activities spill over to private-sector innovation, and that these spillovers are more pronounced in the university region. Accordingly, industry R&D may benefit from the co-location of university research. For the German context, Fritsch and Slavtchev (
2007) find that such spillovers primarily emerge from high-quality research. Their result is supported by research on the individual-level antecedents of researchers’ interaction with private-sector partners. A wide range of studies finds that individual research productivity and knowledge transfer activities are complementary (e. g., Azoulay et al.
2009).
5
2.3 Who wins? Who loses? Potential determinants of imbalances in research funding
The discussion in the previous subsection shows that there are multiple pathways through which differences in universities’ research performance may have economic repercussions on the university region. Accordingly, increasingly pronounced regional imbalances in research funding, which likely give rise to increasingly pronounced imbalances in research output, may be of concern beyond the narrow interests of the affected researchers and university managers. How important these concerns are from a social welfare perspective depends not only on the extent of the regional imbalances, but also on the nature of winner and loser regions. In this subsection, we develop some hypotheses on the characteristics of regions that are likely to benefit or suffer from a shift towards merit-based research funding as has recently been observed in Germany.
To begin with, regions differ in the size of the university or universities located there. Larger universities find it easier to concentrate substantial funds on specific fields or disciplines, which may make it easier to finance large-scale equipment, engage in cutting-edge research in the respective specialization and to attract leading researchers. Among other factors contributing to scale economies, regions with larger university size are better able to offer matching positions to couples of top-level researchers. Larger universities are also more likely to afford specialized staff helping them in their “grant seeking” (Schneider and Ji
1990) activities. In addition, having a larger pool of faculty in the field of specialization provides richer opportunities for mutually beneficial interaction, exchange, and networking, both within single universities and within the same university region. The importance of regional university size is further increased by the fact that, as noted above, large-scale funding schemes have gained in importance over the past decades. Based on these considerations, we expect that “larger” university regions are better positioned in the competitive struggle for research funding, which leads to our first hypothesis:
Universities differ not only in size but also in age, where age tends to be closely related to other differences. In the German context, a key distinction is that between traditional universities, such as Heidelberg and Göttingen, and the more recently established ones. The long history of their universities helps regions to build up reputation as research “hubs”. Such reputation may not always correspond to current research performance but will still be helpful in the competition for external resources. Consistent with this argument, Münch (
2006) criticizes that traditional universities are overrepresented in decision-making bodies such as appropriations committees as well as in reviewer networks. Blume and Postlep (
2009) similarly note that well-known names facilitate universities’ fund raising efforts. These considerations imply that regions which can look back on a long university history will be in an advantageous position in competing for funds. We therefore predict:
University regions’ chances of securing merit-based funding depend not only on characteristics of their universities but also on those of the regions themselves. Available evidence suggests that university research benefits from the interaction with private-sector partners located in the same region (e. g., Blankenberg and Buenstorf
2016). This interaction may take a variety of forms ranging from private-sector sponsoring of university research to industry lobbying on behalf of regional universities. Universities located in larger regions are better positioned to find private-sector partners for mutually beneficial interaction. In addition, more urbanized regions tend to have richer and more diverse economic activities, which may foster creativity and innovation in the region (Jacobs
1961). Based on these considerations, it may be expected that larger regions tend to fare better in the competition for merit-based funding.
Collaborative research with private-sector partners is an important channel through which the research activities of universities may benefit from interacting with their regional environment. Some funding agencies and programs require private-sector collaboration as a prerequisite for funding, and proximity to potential collaboration partners facilitates the identification of suitable matches. To the extent that university researchers learn and develop capabilities in collaborative research projects, such projects may also be beneficial for the acquisition of research funding (e. g., from the DFG) for which no private-sector partner is required. In this case, we would expect university regions with stronger private-sector R&D capacities to have a competitive edge in the quest for merit-based funding. This leads to the following prediction:
Finally, Germany’s public research system is similar to that of other continental European countries such as France and Italy (but different from the Anglo-Saxon model) in that non-university public research organizations (PROs) play a strong role. Cutting-edge research is often conducted at Max Planck Institutes, whereas Helmholtz Centers are important as providers of large-scale research facilities. From a university perspective, PRO facilities are highly relevant collaboration partners in joint projects and in the training of junior researchers. Collaboration is facilitated by co-location, and whereas (due to the federalist funding of German public research) PRO facilities are spread throughout the country, they are not evenly distributed within the individual Länder. For instance, Max Planck facilities in Bavaria cluster in and around Munich (where the Max Planck headquarters are also located). These regional imbalances make it harder for university researchers in regions without such PRO facilities to find suitable partners for collaborative projects. This may be a relevant problem particularly for large-scale projects presupposing a minimum critical size to be competitive. The enhanced importance of such large-scale projects may add to the importance of being part of a larger regional “ecosystem” of research facilities. We therefore conjecture:
In the remainder of this paper, we will test Hypotheses 1–5 econometrically.