Efficiency and competition in English and Welsh universities

There is a paucity of efficiency studies on the higher education sector in Britain. Only a small subset of those utilise stochastic frontier analysis (Izadi et al., 2002; Stevens, 2005). This paper bolsters the existing UK higher education stochastic frontier analysis literature through application of the conditional heteroscedasticity approaches to modelling environmental variables suggested by Coelli et al. (1999). Our database consists of 142 higher education institutions within England and Wales from 2004 to 2009. Application of the net and gross efficiency concepts allows the paper to distinguish between factors which affect the level of frontier cost faced by an institution, from those which only impact on efficiency. The analysis shows that institutions with higher proportions of female students, non-EU students, and STEM students suffer from lower efficiency. Conversely higher levels of female staff, membership to the Russell Group, and offering a Law programme are associated with greater efficiency of institution. Additionally, we provide evidence against the efficiency impact of geographical location and changing fee regime before reporting overall efficiency scores. The disparity in efficiency between all institutions will enable Institutional managers to identify key examples of best practice within the Sector, allow managers to separate increased levels of cost from increased inefficiency, and will suggest potential future areas of regulation and legislation to policy makers. Furthermore, this paper contributes a newly derived measure for research output. This extends measures of research output currently used and improves the precision of the estimated frontier enabling future benchmarking analysis to be more robust. The efficiency measures generated suggest that there may be benefits to mergers within the higher education sector. Following the Bogetoft and Wang (2005) model we evaluate the potential gains in efficiency to be realised through merging various institutions. We find that in several instances there are indeed benefits to be achieved through merger, particularly through joining institutions with specific, narrow curricula to those with broader curricula. Additionally there is also benefit to scale efficiency through merging institutions which occupy similar geography such as Birmingham which hosts five institutions. This thesis finally considers the competitive nature of the higher education sector and how intense that competition is. Through a novel application of the Boone (2008) model we evaluate the change in efficiency over the period of the sample find that there was an increase in competition across the full sample immediately following the fee increase in 2006-2007, though interesting the effects of competition are different between Russell Group and non-Russell Group subsamples. The effects of merger and competition within the higher education sector could inform policy decisions with further fee increases looking ever more certain. Encouraging mergers amongst smaller, focused institutions may provide additional resilience within the system, however the effect on competitiveness within the system must also be considered to ensure ever increasing standards.