Internationalization of Tertiary Education: Strategic Issues

James E. Alvey, Stuart Birks, Gary Buurman

Massey University, New Zealand

Abstract

The modern New Zealand university is an enterprise that needs strategic management. It has been estimated that international degree students currently provide about $75m per year to tertiary education institutions and that tertiary education exports result in some $390m expenditure overall. We address some of the issues that were highlighted at a Forum on the International Sale of Tertiary Education Services held at Massey University in October 1998. Forum participants indicated that significant opportunities were missed because of poor incentives provided within universities and elsewhere. The international market is also changing rapidly, with tertiary institutions in other countries facing similar problems and attempting imaginative solutions.

I Introduction

The legislative requirement for universities is that they are characterised by "a wide diversity of teaching and research, especially at the higher level, that maintains, advances, disseminates, and assists the application of, knowledge, develops intellectual independence, and promotes community learning" (Education Act 1989 S162 (4)(b)(iii)). Colleges of Education engage in teaching and research related to various levels of teaching and polytechnics provide a wide range of continuing education and vocational training (Education Act 1989 S162 (4)(b)(i and ii)). The research function therefore applies to universities and colleges of education, but not to polytechnics (except for degrees, see III.1). It is in this context that we should view the international sale of tertiary education.

This paper arose from a Forum on the International Sale of Tertiary Education Services, held under the auspices of the Centre for Public Policy Evaluation of Massey University, in Palmerston North, New Zealand, on 15 October, 1998. Five papers were presented (by Prebble; Edwards; Graham; Buurman; and Alvey, Duhs, and Duhs - in Alvey 1999 forthcoming) and discussion followed. It is clear that the tertiary education environment is very dynamic, and significant changes can be anticipated in the near future. A number of major issues facing universities were highlighted in the papers and in the discussion. These included: i) whether the international dimension deserved special treatment; ii) problems of pricing; and iii) internal incentive structures. These issues are developed further below.

II The Environment

II.1 The Situation to Date

Until the end of the 1980s, New Zealand’s involvement in international education services was linked to foreign policy and its foreign aid programme (see NZMDB 1987, p. 11). While international students paid either no fee or the same heavily subsidised fee as domestic students, strict quotas were applied to limit their enrolment. In 1988 the government decided to shift from an "aid" to a "trade" approach to international students. The quotas on international students were lifted but fees rose from below $500 per year to a full cost fee of around $8,000 per year for arts, commerce, humanities and law degrees, and are currently about $10-12,000 for a BA or BEd. Applied subjects such as agriculture, computer science, engineering, and science would attract substantially higher fees. New Zealand had decided to enter into the market for international education services. In 1989 these changes were implemented via the Education Amendment Act, including the requirement that tertiary institutions charge international students fees that cover the full cost of delivery.

Section 20.4 of the Education Amendment Act 1989 states:

(4) Subject to subsection (3) of this section, no foreign student shall be or continue to be enrolled in any subject, course, or programme at a tertiary institution unless there have been paid to the council--- (a) An amount fixed by the council (having regard to any guidelines the Secretary has given it) that is not less than the sum of---

(i) The council's best estimate of the cost to the council (including the appropriate proportion of the council's administrative and other general costs) of providing tuition in the subject, course, or programme for 1 student; and

(ii) An amount that is in the council's opinion an appropriate reflection of the use made by 1 student receiving tuition in the subject, course, or programme of the council's capital facilities; and

(b) All fees (if any) prescribed by the council.

What happened as a result? The enrolment of international students increased substantially and tertiary institutions now found that a major revenue source had emerged. The number of fee-paying international students in tertiary education in New Zealand increased from just under 2,000 to about 6,200 in the period 1992 to 1997, as shown in Table 1. Fees from international degree students were about $75 million in 1997. It has been estimated that tertiary education exports, including intensive English language courses, were worth about $390 million in foreign exchange in 1997 (Alvey, Duhs, and Duhs, 1999 forthcoming). Of this, $144 million is attributable to English language courses. The 1998 figures are down about 8 per cent, mainly because of the Asian economic crisis.

Of the regular degree students in 1997, about 73 per cent of international students attending New Zealand tertiary institutions came from Asia. In addition, about 12 per cent of international students attending tertiary institutions were from the Pacific Islands. A similar pattern was repeated within university enrolments. A striking feature of the source of students was the concentration of students from Malaysia. The dominance of Malaysia as a source country declined somewhat in 1997, and further sharp declines are anticipated due to their goal of achieving self-sufficiency in tertiary education. Nevertheless, over 30 per cent of all international students and 40 per cent of all international university students came from Malaysia in 1997. On the face of it, and especially in the light of recent developments, this would seem to be an imprudent dependence on a single source.

Table 1

All International and Full-Fee-paying International Students in all Tertiary Institutions

Sources: Tertiary Education Statistics various years and Department of Education.

Note that grand-parenting or transition of overseas students enrolled prior to 1989 to N.Z. student status may have affected the numbers of full-fee paying students prior to 1992.

In August 1998 a Trust Deed was signed to establish a new industry organisation called Education New Zealand. As Logan (1998) points out, for the first time all of the international education providers engaged in the education and training of international students will be represented by a single organisation. Logan adds that:

Education New Zealand is empowered to negotiate on behalf of providers, the arrangements to promote New Zealand as an education destination for international students. It will facilitate the creation and maintenance of a business plan as the basis for industry co-operation on national promotion…. It is planned that Education New Zealand will be operational from January 1999, with its priorities and functions set by a new industry plan.

This is a major institutional change, but much is left for institutions to manage.

II.2 Current Delivery Options

Prebble (1999 forthcoming) has provided a useful summary of five delivery modes of international education.

• There is direct sale of course materials or programmes to off-shore educational institutions. There are actually few opportunities for such sales and the likely returns to the institution are not likely to be high.
• There are partnership possibilities for the delivery of teaching courses off-shore. In these twinning arrangements there is input from the New Zealand institution and the overseas host institution. This may be a fruitful area for New Zealand institutions, especially in the South-East Asian region. A major cost in this case would be the high demands placed on New Zealand staff who would be required to travel to the host institution and provide teaching (in intensive mode) and assessment.
• Institutions can enter into consortia of educational providers. This mode requires educational providers to set up credit arrangements between the contracting parties to facilitate a flow of students amongst them. The scope for such arrangements is not yet clear but it reduces the discretion and autonomy of the members of the consortium.
• There is the off-shore enrolment in New Zealand distance education programmes. This mode includes correspondence education, teleconferencing, and Internet versions. While there is a strong market for these types of education services, there is considerable difficulty and expense in marketing one’s programmes.
• There is the possibility of participation in virtual university projects. This is an option that has only recently emerged and occurs where an institution joins with other institutions and corporations to establish a large, web-based institution which operates largely independently from the member institutions. While there is a potentially large market for such projects, there would be a loss of institutional autonomy. There are also high capital costs with uncertain returns in this mode.

Should participation in the international education market be guided by individual educators within an institution, by the central administration, or by groups of institutions? There are large financial costs in several of the options mentioned. There are significant risks of wastage of resources, and reputation in the international market is hard to regain if lost. Consequently, it has been suggested that a corporate approach is required: the administration may be required to select the appropriate mix of programmes, media, and delivery options. But these measures run against the long-established pattern of educators individually making decisions on a whole range of matters.

II.3 Strategies of the Players

In addition to using innovative delivery modes, players in a competitive environment may operate on an ad hoc basis to differentiate their product. With imperfect information, poor planning, or short-term objectives, the result can be problematic. In Britain, many universities:

… are offering "bargain basement" one-year deals that could lure students who may find they cannot continue their studies into a second year. … Free bus passes, cheap accommodation, loans and "meet and greet" services are among special offers being touted by institutions in advertisements and on websites. (Tysome, 1998a, p.36)

In Australia, "Some universities have complained that students they have recruited have been lured elsewhere through promises of lower tuition fees and laxer academic and performance requirements" (Maslen, 1998, p.9).

There has also been an increase in the number and type of institutions offering tertiary education: "Universities have lost their monopoly on teaching and research, with global corporations now running their own higher education programmes and buying in expertise from moonlighting professors, according to leaders of the Association of European Universities (CRE)" (Tysome, 1998b, p.1).

Bourke (1997) and Mortimer (1997) found that crucial factors determining overseas students' choice of institution are networks and information. Have students from their country studied there in the past, or do they know students there now? Is there special support for overseas students at the institution? On application, is the relevant information provided rapidly and in a clearly understandable form?

While it may be desirable to have competition at some levels, a broader strategic approach may also be significant, especially with government policy and where there are rapid changes and complex interdependencies. Numerous moves can be observed.

Australia is simplifying student visa applications from 1999 and providing extra funding for marketing of international education. Maslen (1998, p.9) writes:

The Australian Vice-chancellors' Committee welcomed the revised [visa] regulations but attacked the government for not being "sufficiently strategic" in its approach. …The AVCC executive director Stuart Hamilton said the positive changes included the retention of student work rights, which were an essential marketing tool. "But it is frustrating the government has not listened to our arguments that the level of visa fees and charges are a disincentive to expansion in the industry," he added. …The government needed to promote closer regional educational links, support staff and student exchanges, and offer more scholarships for needy new students.

… In a related decision, education minister David Kemp announced the government would spend $21 million over the next four years to support the marketing and promotion of Australian education and training services through its marketing arm, Australian Education International.

The UK has also moved to simplify and relax admissions procedures, noting in particular that deadlines for applications may be too early for some countries (Swain, 1998, p.1).

France has also relaxed its requirements, making admission into the country easier for researchers and allowing students to take paid employment to a greater extent than previously (Marshall, 1998, p.13).

In Europe the challenge to universities has also led to calls for strategic responses on the grounds that too little is being done at present. Suggestions include "strategic alliances" with stakeholders so that universities can respond more rapidly to changing professional training needs. Tysome (1998b, p.1) mentions a report on these problems:

Although universities are expected to play an important role in technology transfer and as a magnet for inward investment, institutions often have no coherent strategy for turning this into a reality. …The report says: "It may also be questioned whether prevailing university structures and leadership roles are adequate for the type of networking now being demanded of higher education institutions."

Strategic moves in the UK include assessing institutions and giving a "kite-mark", or mark of quality, for courses of a suitable standard offered overseas. The issue arose after several instances of dubious practices with international joint ventures. In addition, the British Council already assists institutions with the establishment and marketing of distance education courses abroad (Tysome, 1998c, p.67). It is also suggested that the scale and cost of today's universities determines that state funding is vital, and that, "their intimate relationship with knowledge-based industries means that it is no longer possible or desirable to separate commerce from learning" (Editorial, THES, 1998, p.14).

III The Strategic Framework

III.1 Context

It is important to view the international sale of tertiary education in the wider context of the general objectives of tertiary institutions. These institutions are concerned with teaching and research. Funding for these institutions varies in the way it recognises these two activities. Some funding is provided for specific research, as with contestable sources such as FoRST, or with specific research contracts from public or private bodies. Other funding is based on student numbers, and hence directly related to teaching. This latter can also include a component to cover unspecified research. One requirement of the Education Act is that a degree must be taught mainly by people engaged in research (s 254 (3)(a) and (b)). The White Paper, Tertiary Education in New Zealand (1998), advocates a shift of $80 million of the student-number-based research funding into a contestable pool. This indicates that there is not a clear and consistent division between the production of teaching and research outputs. Therefore there are difficulties specifying which costs relate to teaching and which to research. This has associated pricing implications.

With the funding environment becoming more competitive, institutions will have to focus more closely on the amount of funding they obtain for both research and teaching. Competition for students, domestic and overseas, is not straightforward. Markets may not be clearly defined. Currently a distinction is drawn between international and domestic students. This may be appropriate as there are differences in funding sources and various regulations. Domestic students are funded through the fees they pay and a government subsidy to tertiary institutions. There is no intended government subsidy for full cost recovery overseas students (although cross-subsidisation could occur in either direction if costs are incorrectly calculated when setting fees).

Fees for individual papers do not seem to represent the actual costs of those papers. Instead, they seem to be based on a rule of thumb. For example, for international students at Massey University in 1999 the following papers all have the same fee of $1312.50 to international students in 1999: Introductory Business Communication; Introductory German Language II; Greek Art (2^nd year).

It is not clear that institutions should have a preference for one type of student over another if the total funding per student coming to an institution is the same for all types or reflect cost differences accurately. The concept of full cost recovery for international students suggests that this is the case. Where costs are the same, government policy favouring certain types of students should take effect through differences in the share of costs born directly by those students, not by the total payment to the institution.

Strategically, it is only appropriate to single out international students if they have special characteristics. It may be that domestic and international students have different backgrounds in language, previous education, etc.. They may want different qualifications. There may be different marketing strategies needed in order to make contact. Tertiary institutions are operating in an environment partly specified by governments. There could be policies on numbers, entry permits, fluency in language, or recognition of qualifications in different countries, for example. These may differ from country to country, so it may not be appropriate to consider international students as one group anyway.

In summary, we cannot easily separate teaching and research for costing and pricing policy, and it is not clear that we should view students as being in two groups, domestic and international.

III.2 Pricing Issues

There are a number of basic issues in the pricing of tertiary education for overseas and domestic students.

We must distinguish between the amount of revenue that the institution receives for each student (overall receipts per student including government contributions, for example) and the fee paid by each student (direct charge to the student). This section concentrates on the fee paid by each student, while keeping revenue considerations for the institution in mind. First we outline the rationale for current thinking.

It might be tempting for the institution to charge the same fees for domestic and overseas students. This would lessen administration problems and be non-discriminatory for the students themselves. Also with the emphasis on user charges, there is a view that domestic fees should be raised in the direction of full costs.

Notwithstanding what has been said above, a case for lower domestic fees due to market failure (see Haveman, 1976, pp. 34-6) can be made with the help of the model of supply and demand. Quantities of tertiary education could be allocated by market forces. On the demand side, individuals in the private sector would be willing to pay for education because of higher expected future earnings which could arise from actual acquired skills, or screening, etc. With supply, profit maximising private institutions would offer higher quantities of education at higher prices. The result would not be ideal, however. The equilibrium quantity would be less than the efficient amount of education for society due to an undesirable distribution of income or wealth, or other market failures. A major market failure is the presence of externalities. In the case of education, extra (spillover) benefits are conferred on society which are additional to the benefits that accrue to an individual. The policy suggested by the model is to increase the quantity of education by providing a subsidy. This means a fee for domestic students that is less than full cost. Note that the analysis stops short of providing tertiary education at zero cost to domestic students since there is a private benefit to the consumer of education. The model suggests a payment from both students and government.

The situation changes in the case of the international sale of tertiary education. Most foreign students will live and work outside of the country providing the education upon completion of their degree. The country of origin then receives the bulk of the spillover benefits. Suggested possible benefits to the provider country include: trade links; diplomatic ties; and cultural awareness. Unless such benefits are significant, a small or nil subsidy from the provider country is appropriate. Also, since overseas taxpayers do not generally contribute, low fees can be seen as a cross-subsidy from provider taxpayer to overseas taxpayer. This means that there is a case for different pricing strategies for domestic and overseas students. A case could also be made for governments to subsidise their own students studying overseas due to external benefits received.

The case for different pricing strategies is from the viewpoint of the economy as a whole, but may not apply for an individual institution which is likely to have its own objectives. If revenue is a major objective, there may be upward pressure on domestic fees.

From an economic perspective, there are a number of other issues that should be expressly considered in relation to efficient pricing of international education. These include:

• It is still unclear whether New Zealand government policy is recommending prices to international students be set at average or marginal cost, even though full cost pricing has been legislated. Early policy statements seemed to suggest average cost, later marginal cost is at least implied (see Alvey et. al., 1999 forthcoming). Efficient private sector pricing in economics means that price is set equal to marginal cost. For society as a whole, efficient pricing would equate the marginal social benefit of a student to the marginal social cost of providing education. The relationship between average and marginal cost depends to a large extent upon the degree of excess capacity in tertiary institutions and would tend to be course-specific. Given an ‘uncrowded’ degree program that is already in place for domestic students, the extra (marginal) cost of admitting an international student is low. Conversely, we might find high marginal costs in ‘popular’ degrees like accounting and engineering. Further complications arise in identifying long-run marginal costs, and where natural monopoly characteristics (diminishing average costs) apply, marginal cost pricing would result in losses being incurred.

• Price affects the demand for tertiary education from overseas students. In the long-term, fee levels are likely to be significant in a competitive environment (Treasury, 1987, p.260) and exchange rate changes will affect fee levels. The Times Higher Education Supplement (1999, p.3) reported research findings that, "a university’s reputation for scholarship is less important to overseas students than the cost of tuition and its range of courses." Other factors (accommodation, travel fees, perceived quality, etc.) also influence demand. Currently a single pricing policy throughout New Zealand would reduce the number of competitors each institution faces through price competition. This latter could be a consideration for Education New Zealand.

• Non-price competition may also occur. This can be observed in the recent increase in advertising by tertiary institutions in the market for domestic students. The effectiveness of this strategy would depend on the sensitivity of students to the perceived characteristics of the various institutions, their other sources of information, and the potential for the market overall to be expanded. It is by no means guaranteed that such competition will result in net gains to the institutions overall.

• Should tertiary institutions be charging a fee per paper, a fee for each year of study for a specific degree or the same fee for each paper from the institution? The smaller the pricing unit, the closer we can get to efficient pricing, but costs are involved in gathering the specific data on course provision.

There are some questions that are important in the pricing policy decision. While we would expect that a different price should be charged for overseas students, should institutions price at full (average or marginal) costs, or should there be some other (government) contribution? What pricing structure is used by competitors? Do we require a single pricing structure for all New Zealand tertiary institutions if all are offering the same thing? It is also important to consider the exact unit (degree, paper, etc.) that is being priced. Recourse to cost-benefit analysis in this area will help to resolve these questions (see Johnson, et. al., 1997, pp.44-54).

III.3 Incentives

There are also general issues involving pricing that are important at the level of the individual institution which affect the allocation of overseas students. In this section we are mainly concerned with incentives.

In post-1984 New Zealand a change in the philosophy of economic management adopted by successive governments has involved freeing up of the economy and massive restructuring. This meant that the education sector is more able to take advantage of opportunities in international markets. Nevertheless, internal blockages to market forces in education exporting institutions can (at least partially) offset these new opportunities. Structures long in place, plus resistance to change, can restrict the available supply of places to foreign students. For example, academic tenure makes it difficult to reduce staff in subjects where demand has fallen off and, trade unions for staff resist different salary scales in different subject areas. These structures can cause cost disadvantages that could harm New Zealand’s competitive position. A particular course might be crowded with no places for overseas students because it is largely publicly funded, and the extra expense of providing additional places might not be recouped by a department. Thus there are requirements for resources to be more mobile within universities if a strategy to attract overseas students is mounted. Further, if staff promotion criteria are heavily weighted towards research, there may be little incentive for individual staff members to support the strategy. While there may be resistance to promotion based on teaching ability, teaching of an acceptable standard could be a specified requirement, thus introducing a disincentive for bad teaching.

Given that these types of impediments cannot be completely removed, much can be accomplished in the areas of funding and incentives. For example, there has been a move away from tenured academic positions to appointments on fixed-term contracts (commonly of one or three years). This is intended to give greater flexibility, but there may be other less desirable side-effects.

There have been changes in incentive structures for research also. Recent changes mean that individual staff are less likely to benefit from funding that they attract, and so are less likely to pursue these funds. The trend towards making research funding contestable further increases the costs of obtaining such funds and affects the type of research undertaken.

In the Forum on Tertiary Education, Edwards presented, as a case study, a potential opportunity for Massey University to mount a course in education in Malaysia. The course was to be taught extramurally with staff visits and block mode lectures. Much of the infrastructure was already in place. Nevertheless, a key problem was eliciting support from departmental staff. There was little financial incentive and an increased workload, in exchange for the possibility of travel. Academic staff place different values on non-monetary incentives. For example, some might rank travel above increased research time, but almost all would respond to monetary payment or promotion. Hence in terms of a strategy to increase the sale of tertiary education, the proper hierarchy of incentives is important. Not only must an institution have an incentive to pursue this strategy, but departments and individuals should be rewarded for mounting programmes and new initiatives.

IV Defining the Strategic Problems

IV.1 Is International Tertiary Education a Special Case?

Are there similarities among international students, and are they different from domestic students? This is an aggregation problem. Is there a case for focusing specifically on international students? If so, dimensions would include: courses of study; countries of origin; background skills; cultural factors; external benefits to provider countries; any general differences in costs and benefits to individuals, institutions and countries; links to research. Also, should institutions be co-operating in their international marketing efforts, and are government strategies required (see II.3)? Alternatively, or in addition, disaggregation by delivery mode may be more practical, especially given the speed of change in this area (see II.2).

IV.2 What are Appropriate Pricing Rules?

Fees set according to an assessment of average cost are likely to be inefficient. It can be difficult to calculate more appropriate prices, however. Problems include the identification of marginal costs which vary between the long- and short-run, or where costs are shared over courses or over research and teaching. Costs may vary by student or student type. What share of contributions should be provided by relevant governments? There are also costs involved in more complicated pricing structures, so rule-of-thumb approaches may be preferable.

IV.3 What Internal Incentive Structures do Institutions Need?

If institutions are to achieve their chosen objectives, it is necessary for them to have internal structures which are consistent with individuals making the required contributions. Appointment, pay and promotion criteria as well as work conditions and management structures must be suitable. This may not be the case at present, resulting in tertiary institutions being inflexible in the face of changing market conditions.

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