Canadian universities perform multiple functions, but most individuals close to the university sector would agree that chief among these are teaching and research. These two functions are complementary and mutually reinforcing and at times they merge, but they are also usually viewed as distinct. Improving the productivity of both is an important public policy issue. I suggest that the manner in which universities are funded influences the efficiency with which they operate, since it affects incen- tives at the individual and group levels. Moreover, address- ing incentives at both these levels appears to be particularly important given the institutional structure of universities.

Before looking at approaches to increasing productivity, it is worth addressing the importance of research. Unfortunately, many Canadians do not appear to be aware of this function of universities, thinking of them only as teach- ing environments. But, the research role of universities, espe- cially given the advent of an increasingly knowledge-oriented society, is crucial for cultural, technological and economic development. On the technological side, for example, an Industry Canada report points out that Canadian universities, apart from their educational role, are extremely important players in creating knowledge and promoting the diffusion of new technologies. Crucially, it shows that Canada lags behind other G7 countries in research and development rela- tive to the size of its economy. However, this is despite the fact that the university sector’s share of the nation’s research and development is among the highest in the G7. Moreover, universities are also shown to play an important direct role in the commercialization of technology.

Overall, both university teaching and research have strong impacts on national productivity growth and the standard of living of its citizens. Moreover, given Canada’s declining standard of living relative to that of our southern neighbour, and our desire to maintain a unique cultural identity, it is very important that universities operate effi- ciently. Currently, research and teaching have only partly differentiated funding streams. It seems likely that improved efficiency, which in this environment involves both quality and quantity issues for a fixed level of funding, could be achieved with inde- pendent funding streams.

Two broad approaches exist for dif- ferentiating funding streams: one focuses on funding individuals direct- ly, while the alternative involves fund- ing institutions. For teaching the choice does not seem to be subject to debate: governments should fund institutions. However, for research the answer is not as obvious. Examples of each option are provided by the sys- tems in operation in the US, and the UK. Without going into the minutiae, the Canadian system will be compared to that in each of these countries, and I will argue that moving to a system more similar to that in the UK, which funds institutions, would be advantageous for Canada. Naturally, some Canada-specific modifi- cations would be required. This move may not, however, be as great as it first appears, since I believe that our nation is already moving in that direction; we need only go further. In mod- ifying university funding streams to independently reward teaching and research, improvements could be achieved in the operation of each, and in their joint functioning.

Given the nature of our confeder- ation, the two main university func- tions are primarily the responsibility of different levels of government: teaching is provincial, and research is federal. But, unsurprisingly, there is overlap and some controversy regard- ing this division. The extent of this separation of powers is seen in the flow of funds to universities: operat- ing grants based primarily on student enrolment come from the provincial governments, and federal granting councils fund research. (Of course the picture is more complex than this: the federal government also has a role in transferring funds to the provinces, and some research funding comes from other agencies, but these are side issues.) However, I do not want to overstate the funding split. Despite the federal granting councils having a large hand in setting the research agenda (and attempting to take much of the credit for research), research has actually been very heavily subsi- dized by provincial government grants, which are not particularly sen- sitive to quality and quantity. Moreover, like many aspects of Canadian politics, the ”œseparation” of responsibilities is not without chal- lenges ”” for example, Quebec runs its own research granting council.

Note that this argument is not about the absolute level of funding to universities. While an argument can be made that real funding per student to Canadian universities has been in decline over the last decade as political attention has been focused on health care, the issue at hand is the structure of university funding, not its level.

University research is an intellec- tual activity that involves motivating individuals, but it is also a team or group activity that involves hiring and co-ordinating individuals within aca- demic units. However, universities, unlike many other organizations, are largely self-governing, or collegial environments, since both the teaching and the research are sufficiently spe- cialized that it is difficult for those out- side each discipline to understand and evaluate the work that occurs. (This is the case across academic fields of study; thus, even within a university, a senior administrator is not normally able to evaluate the work going on in most departments.)

The problem, then, is to simulta- neously motivate individual and group efforts, on multiple dimensions, in a particularly complex environment. It has been argued that the tenuring process solves some of these problems, which implies less need for funding to be used for this purpose. Tenure is an ”œup or out” system whereby, after a ”œtrial” period of approximately five years, new faculty are either laid off (their initial contract is not renewed) or given very strong job security. It has been argued that without tenure, hir- ing decisions would be very difficult to make in a university context. Without job security, who really wants to hire someone who is as good as (or better) they are in the same field? And who can judge quality in a special- ized field except those in that field? But, tenure is a blunt instrument, and while it pre- vents extreme negative events, it does not prevent less severe ones (such as loss of prestige) and it does not provide any ”œcarrots” at the group level. Also, it is difficult to attain multiple goals with a single policy lever. A response is to increase the number of policy levers in an effort to increase efficiency. One approach to increasing the number of levers is to introduce differentiated (or more differentiated) flows of funds for university teaching and research.

US state-funded universities receive grants much like their Canadian counterparts, but there is an important difference in remuneration at the individual level with respect to research. Unlike Canada, salaries are considered a legitimate research expense for US granting councils (and many private foundations). A legal ”œtrick” facilitates this: university facul- ty in the US normally work a nine- month ”œacademic” year (though in most places they can opt to have their salary dispensed over 12 months, and benefit coverage is for the full year). Thus a research stipend is termed ”œsummer money.” In Canada, salaries are comparable (or let’s assume compa- rability for the sake of this argument) in magnitude, with the nine-month US ”œuniversity salaries,” but faculty are full-year employees.

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The result of the US approach is that those who win research awards effectively increase their salary, and research is thereby financially rewarded. This has the potential, sometimes realized, to allow universi- ties to focus more on rewarding teach- ing and lets the granting councils reward research. This approach, how- ever, tends to be very narrowly focused and does little to solve the team- or department-level motivation problem. On the plus side, those who win such grants do not draw resources away from other faculty members, and there are sometimes positive spillovers from grant holders to others. Despite my negative conclusion regarding this approach, many of the world’s best universities are in the US. However, they tend to be private institutions and have funding levels well in excess of that observed in Canada. The cur- rent proposal is for improving efficien- cy given the modest resources available in Canada compared to the best institutions in the US. Of relevance is the impact of the distribution of fund- ing, holding the level con- stant, in a publicly funded university system.

I hold the UK approach out as a potentially superior alternative, espe- cially in the Canadian context where there are essentially no private univer- sities. In the UK, although there is a single level of government that funds universities, a very conscious decision has been made to split the funding into two streams. Note that, unlike in the US, both funding streams in the UK go to universities, not individuals or departments, and it is explicit that there are no restrictions on the way universities use the funds internally.

Funding for teaching is based on the number of students that can be taught in each institution. In effect, there is some smoothing built into this since enrolments fluctuate from year to year. While there are differ- ences, this is not dramatically dissimilar from the ”œcorridor” system employed in Ontario, which recog- nizes that students’ plans can change and enrolment targets are best thought of as a range rather than a single number. However, while Canadian provincial funding is based on enrolment, the monies are used for more than teaching. Care needs to be taken to recognize that in the UK, as in the Canadian context, the costs of training people in different fields can vary substantially. For example, humanities and social sciences tend to be much less expensive than science, engineering and medicine.

Funding for research has been han- dled completely separately in the UK since 1986. At regular intervals research in each subject area at each university in the country is evaluated through a peer review and placed on a seven-point scale (labeled, in typical British fashion, as: 1, 2, 3a, 3b, 4, 5, and 5*). Funding is allocated according to this scale, and the strong position is taken that universities on the bottom end of the scale in a subject are not funded from the research budget for that subject. However, a recent govern- ment sponsored evaluation of the system suggests that there is less dis- crimination provided by the exercise than the rating scale would suggest. Nevertheless, the approach is generally viewed as being successful, and research productivity has increased. As an example of the latter, the evalua- tion indicates that the average citation rate of UK academic papers has increased by 12 percent relative to the rest of the world since the system was implemented. Two details are worth not- ing about this approach. This exercise requires deci- sions about allocating funds across and within fields; of course, Canada’s granting councils answer the same questions. Second, as mentioned, this only deter- mines the funding of each institution, but does not restrict how the funds are used within institutions.

By separating the flow of funds to universities according to function, incentives are more appropriately aligned with effort, which can increase performance. An element in research of between-institution competition is introduced. However, by funding at the institution level rather than the individual one, the team, or group, aspect of the university system is bet- ter addressed. Unlike the US system, research success by one individual has obvious beneficial implications for all within the same department and uni- versity, which encourages mutual support and improved co-ordination and co-operation.

In the Canadian context, the most obvious implication of this proposal involves a clearer move toward the provincial government funding teach- ing and the federal government fund- ing research (although the two cannot be separated entirely). This would mean the provinces reducing their share of the funding flow and the fed- eral government sharing its increases. In a sense, this has started to happen in a creeping sort of way. Provincial funding per student is declining in real terms in most jurisdictions. On the other side, for the first time the federal government has very recently started to fund research overheads (e.g. elec- tricity, administration etc.), although in a very limited way. Further, the rel- atively new Canada Research Chairs program is funding university research positions for excellent researchers in proportion to each university’s rewards from the granting councils, a reasonably good approach to ranking research output, which has the added benefit that it has zero incremental cost. Also akin to the approach in the UK, each institution is relatively free to use funds internally, though funds are allocated to broad areas (e.g., science and engineering, or social sciences and humanities), and each university nom- inee had to be approved by a national committee.

While I am not advocating a wholesale adoption of the UK’s univer- sity funding scheme, it seems clear that both the US and the UK have funding policy levers that permit those country’s university sectors greater degrees of freedom to motivate high quality academic teaching and research. As knowledge becomes an increasingly important precursor to our nation’s cultural, technological and economic advancement, it seems increasingly important to ensure that our universities are operating to the greatest benefit of the nation on both fronts. Modifying the funding of the sector to improve incentives, and doing so in a manner that recognizes the unique aspects of universities, is a project well worth considering.

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