Effect of Government Funding on Operational Efficiency of Public Universities in Kenya

Abstract

The causal nexus between government spending and operational efficiency in the economy has not received much attention in literature. The few available theories conflict on the actual effect of increased government expenditure. The Keynesian view postulates that government expenditure, even of a recurrent nature, can contribute positively to production efficiency. On the other hand, others opine that as government expenditures steadily increase, the principle of diminishing returns comes into play up to some point upon which further government expenditures increase results in economic stagnation and eventual decline. The aim of this study was to ascertain the effect of government funding on operational efficiency of public universities in Kenya. The population for the study was all 7 public universities in Kenya that were in operation between January 2008 and December 2017. The independent variable for the study was government funding as measured by the natural logarithm of government spending on public universities on an annual basis. The control variables for this study were debt structure as measured by debt ratio, liquidity as measured by current ratio and university size as measured by natural logarithm of total assets. Operational efficiency was the dependent variable and was measured by the ratio of total revenue to total assets. Secondary data was collected over a ten year time frame (January 2008 to December 2017) annually. Descriptive cross-sectional research design was employed for the study and the relationship between variables established using multiple linear regression analysis. Data analysis was undertaken using the SPSS software. The results of the study produced R-square value of 0.219 which means that about 21.9 percent of the variation in efficiency of public universities in Kenya can be explained by the four selected independent variables while 78.1 percent in the variation of operational efficiency of public universities in Kenya was associated with other factors not covered in this research. The study also found that the independent variables had a weak correlation with operational efficiency of public universities in Kenya (R=0.468). ANOVA results show that the F statistic was significant at 5% level with a p=0.003. Therefore the model was fit to explain the association between the selected variables. The findings also showed that university size produced negative and statistically significant values for this study. Government funding, liquidity and debt structure produced statistically insignificant values for this study. This study recommends that university management should ensure efficient utilization of their assets to improve operational efficiency as this study has found that large firms are less operational efficient due to underutilization of assets.