WHY DO NGOS DIVERSIFY THEIR ACTIVITIES?
PECUNIARY AND PRIVATE BENEFITS
4th Annual Nottingham-Birmingham-Warwick
ESRC DTC Conference
Canh Thien Dang
Nottingham School of Economics, cohort 2014-2018
Supervised by: Professor Oliver Morrissey and Dr Trudy Owens
Outline
Motivations
Defining the research questions
Methodology
Key theoretical results
Data: The Ugandan NGO sector in 2008
Key empirical results
Potential impacts
Motivations
 Rumours and tentative evidence of that NGOs may
opportunistically introduce activities to grab new grants:
• The Ugandan and Malawian NGO sectors grew enormously in mid-
2000s following announcements of new funding towards HIV/agriculture
 To inform donors on how to motivate NGO diversification
• Expanding to new activities may be beneficial but potentially inefficient
(transaction and management costs)
 To examine the true incentives underlying NGOs’ decision
making process
• Are they driven by altruism or by money?
Research Questions
How do monetary and private benefits affect the NGOs’
decision to diversify?
 Two definitions of “diversification”
1. The decision to introduce new services: measured by the total
number of services in operation
2. The allocation of budget across services: measured by a budget
diversification index derived from the HHI (concentration index)
 Monetary benefits:
1. Diversification can reduce risks related to income stability
2. Whether and how NGOs would respond to different sources of
funding: international donors, private donations or local donors?
 Private benefits: do they matter?
Private Benefits of Diversification
 Unobservable desire that may not be in line with donors’
• A challenge for quantitative analysis!
 Four types of private benefits derived from diversification:
1. Signaling ability: to attract new donors, to procure new grants; or
better future job prospective
2. Pay rise and entrenchment: to increase salary and job security
3. Egoistic motivations: to derive privilege or improved social status
4. Altruism: more activities to accommodate more beneficiaries?
(new evidence from experimental economics suggest it may not be the
case)
 Capture private benefits by proxies!
Methodology
1. Solve a multitask principal-agent model that
incorporates both risk reduction and private benefits
•
•
Donor predicts NGO’s action and diversification to offer a contract with
monetary incentives conditioning on the development value (to donor)
NGO decides whether to take the contract and exert their optimal action and
diversification
2. Derive testable implications/predictions
3. Employ a dataset with proxy measures
4. Use econometric analysis to test the predictions
• Complemented by robustness checks (using control
variables), specification tests
Theoretical implications
1. Private benefits always encourage diversification
(positive)
2. The effect of pecuniary benefits (funding from donors)
depends on the underlying motivations:
•
•
If diversify to primarily reduce risks, funding will discourage
diversification (negative)
If diversify to primarily derive private benefits or if discomfort
from development activities is too high, funding will encourage
diversification (positive)
3. Testable: look at signs of coefficients
Data: the NGO Ugandan sector
•
500 NGOs
•
On average, each NGO operates 4-5 activities
•
Monetary benefits:
•
•
•
31% of NGOs received donor/external funding in 2007-2008
•
76% of revenues from donors’ grants, on average
Proxies for private benefits:
•
Proxies for intention to capture new grants: whether NGOs involved in
HIV/agriculture services (32%, 27% respectively)
•
Proxies for altruism: religious affiliation (24%); manager is female (26%)
Control variables:
•
Employment size
•
Constraints on decision: whether NGO needs internal and external approval
Key empirical results
•
Using: Poisson and the two-step Cragg’s Tobit estimators
•
Effects of already received funding is generally insignificant

•
NGOs do not diversify primarily to reduce risks
Private benefits matter
1.
Intention to capture new money for HIV/agriculture sectors has positive effects
on NGO’s decision making process
2.
So is funding security
•
All proxies for altruism are insignificant.
•
Results are fairly robust when budget diversification index is used
1.
Committed managers with longer tenure are more cautious
2.
More risk-averse managers tend to diversify more
Conclusion
• NGOs diversify to attract more funding in the future. They
may use their portfolio to signal their competence
• Private benefits and characteristics of managers matter
• Potential Impacts on designing aid contracts:
1. Donors and the public could consider other benefits apart from grants
to motivate NGOs
2. Altruism may not be the only motivation behind altruistic firms
3. NGOs’ decisions should be more accountable
Thank you for your attention