Introduction

Private higher education plays an important role in many countries worldwide, with approximately one-third of the world’s university students attending private universities (Levy, 2018). However, the quality of private universities varies worldwide, and the quality of private higher education in some developing countries is low. In some developed countries, private higher education accounts for a large share of higher education and achieves high quality. In the United States, of the more than 4700 universities, 57% are public and 43% are private. Of the top 10 US universities in the 2022 QS World University Rankings, 5 are private. However, in some developing countries, there is a large percentage of private universities, but their quality is lower. In China, there are 3013 universities, of which 764 are private, and the quality of private universities is significantly lower than that of most public universities (Zhou and Liao, 2021; He and Liu, 2023; Liu and Jiang, 2021). In India, 277 of the 799 universities are private. Some private universities are positioned as high-quality universities, but there is still a significant gap in quality and productivity per capita compared to centrally funded higher education institutions in India (Banshal et al. 2019). Therefore, for some developing countries with a high proportion of private universities, high-quality higher education can be developed by promoting high-quality private universities.

An effective path to achieve high-quality higher education may entail dividing private universities into not-for-profit and for-profit universities. In some developed countries, private universities are under either “not-for-profit” or “for-profit” management, and some not-for-profit private universities have achieved high-quality development. In the United States, some top private universities, such as Harvard University and Stanford University, are not-for-profit. In Japan, several well-known private universities, such as Waseda University and Keio University, are also not-for-profit. Although most private universities in China are registered as “private not-enterprise” entities, they are in fact for-profit and have low quality. Thus, the issue of whether not-for-profit private universities are more likely to achieve high quality than for-profit private universities are deserves further study.

To improve the quality of private universities, the Chinese government and Ministry of Education have implemented not-for-profit and for-profit classification management policies for private universities. However, the policy objectives have not been achieved. In 2016, the Law on the Promotion of Private Education (Amendment) (NPC official website, 2016) was passed by the National People’s Congress (NPC), requiring all private universities in China that were previously registered as “private not-enterprises” to be reregistered as either not-for-profit or for-profit, and the choice of not-for-profit or for-profit belongs to the investors in the private universities. In 2021, the Chinese government continued to promulgate the Implementation Regulations (Regulations on the Implementation of the Law on the Promotion of Private Education, 2021). The Implementation Regulations aim to further promote the reregistration, classification management and high-quality development of private universities in China. Although the Chinese government requires private universities in China to reregister as either not-for-profit or for-profit, the implementation of the policy has been slow. After 6 years of the policy’s implementation, fewer than 20 of the 764 private universities had been reregistered (Development Research Center of the State Council official website, 2021).

Based on system dynamics, this study aims to explore how private universities in China choose between the not-for-profit and for-profit orientations to achieve high quality. It first reviews the relevant literature, introduces the research methodology and constructs a system dynamics model of private university development. Then, based on the classification management policy of private universities in China and the concept of “high-quality” development, the 4 following paths are obtained: the steady development of not-for-profit management, the rapid development of not-for-profit management, the steady development of for-profit management and the rapid development of for-profit management. Next, the study takes K University as an example and simulates the evolution of the 4 development paths from 2022 to 2031 by adjusting four control variables: government financial allocation, tuition growth rate, land cost and tax expenditure. Finally, it discusses which of the 4 paths best supports the high-quality development of private universities and proposes 3 strategies. Notably, there are few English-language studies on not-for-profit and for-profit private universities and no quantitative study on the development of private universities after the selection between the “not-for-profit” and “for-profit” orientations is made. Therefore, this article provides a reference for private universities in China regarding the “not-for-profit or for-profit” choice and shares some useful experiences for the reform of private universities in other developing countries.

Literature review

Many countries worldwide are developing private higher education. The growing demand for education and the inability or unwillingness of the public sector to handle this surge (Su, 2004; Kinser et al. 2010; Douglass, 2012), combined with the spread of higher education and changing perceptions of higher education funding, have led to the expansion of private universities (Altbach and Levy, 2014). In the United States, some for-profit institutions have become an important part of the higher education market (Melissa et al. 2018; Luis et al. 2022). In addition, the government of the United Kingdom is keen to promote the growth of private institutions as a way to stimulate competition across the higher education sector (Hunt and Boliver, 2023). In South Africa, there is room for the development of for-profit Christian higher education institutions (Diedericks, 2019). Commercial companies own and manage many private universities in Vietnam (Chau et al. 2022). It is not difficult to find that most countries have been developing their private higher education institutions, which is salutary for the development of education.

There is controversy regarding the management of not-for-profit and for-profit private universities. Most countries are actively exploring the classification management of private higher education institutions as either not-for-profit or for-profit (Archambault, 2001). Organization, privacy, lack of profit distribution, autonomy and spontaneity are basic characteristics of not-for-profit organizations (Kevin, 2014). Among these characteristics, the most important is “lack of profit distribution”. According to this characteristic, private universities should not share profits if they choose the not-for-profit orientation. The expansion of private universities has diversified the higher education system (Mike et al. 2021). However, some scholars argue that private universities are subject to profit motives (Shah et al. 2019). Other scholars argue that students may obtain positive rewards whether they complete their bachelor’s degrees by attending for-profit or not-for-profit universities (Denice, 2015) and that not-for-profit or for-profit status alone is not a determinant of institutional quality (Richard, 2015). Therefore, it is necessary to further research the not-for-profit and for-profit management of private universities.

Private universities in different countries are facing challenges in managing risks and developing quality. The United States has both top not-for-profit universities with global reputations and numerous for-profit private higher education groups, among which these for-profit education groups deserve attention. For example, the Apollo Education Group (AEG), founded in 1973, has long been known for its profitability. As it grew in size, the group was rewarded handsomely with its IPO in 1994, but with declining student numbers and declining government funding, the group faced a major operational crisis and was delisted in 2017 (Yang, 2019). Some for-profit higher education institutions are troubled by allegations of fraud and other questionable practices (Beaver, 2012). In Japan, 80% of private universities enroll the majority of students, and 40% are defined as family-owned. Family-owned and managed higher education institutions are at greater risk (Breaden and Goodman, 2023). In India, private universities account for 35% of total universities, and there is a significant quality gap between private universities and centrally funded universities (Banshal et al. 2019). In China, there are few high-quality private universities. Many private universities in China were previously registered as “private nonenterprises”, but they are currently making a profit (Zhou and Liao, 2021). In Ethiopia, from the perspective of private higher education accreditation and regulation, the level of law needs to be improved (Tamrat and Teferra, 2023). Therefore, private higher education needs to be reformed.

In China, the classification management reform of private universities has been implemented for 6 years, but the choice between the not-for-profit and for-profit orientations for reregistration is a dilemma. Many scholars have analyzed the factors influencing private universities’ choice between the not-for-profit and for-profit orientations from the perspective of private university investors (Yang, 2019; Pan, 2018; Duan and Yang, 2021; Liu et al. 2021). Scholars have also explored the difficulties of implementing classification management policies from the perspective of education administration (Bie and Shi, 2020; Duan and Yang, 2022). In some provinces, a few private universities are forced to choose the “not-for-profit” orientation, despite the legislative intent of allowing independent choice (Dong and Qi, 2020). Some private universities may face Hobson’s choice (Que and Deng, 2020). Such outcomes do not meet the policy goals behind reregistering private universities as not-for-profit or for-profit.

System dynamics is applied in research on private universities. Many scholars have applied system dynamics to the areas of sustainable competitive advantage, financial control and internal control in private universities. Sheng and Li (2015) constructed a dynamic system model of the sustainable competitive advantage of private universities. Chang and Zhang (2014) selected typical cases and applied system dynamics to analyze the internal control system of private universities. Zhang et al. (2013) analyzed the internal control system of private universities in 5 subsystems: faculty structure level, student population, logistics industry, available funds (financial surplus) and infrastructure level. Zeng and Yu (2010) constructed 3 models using system dynamics, for example, to obtain the “growth ceiling” of a private university. Liao and Li (2014) divided the construction and operation of private universities into seven subsystems, namely, demand, faculty, cost, income, investment and financing, equilibrium allocation, cash flow and net present value.

System dynamics model

Methodology

Regarding the procedure, system dynamics is a method for system analysis and qualitative and quantitative analysis of socioeconomic issues, and it allows simulation models to solve system problems involving prediction, analysis and evaluation (Wang and Wang, 2022). It can be applied to study the dilemma private universities in China face regarding not-for-profit and for-profit reregistration. This study adopts this method to further explore the high-quality paths supporting the development of private universities. There are four steps in its application. First, based on the literature and system analysis, four subsystems are identified to construct a framework of the development system of private universities. Second, after identifying all variables, a system dynamics model of private university development is constructed. Third, the model is tested, and four development paths are designed. Finally, K University, which has been studied by the authors in depth for a long time, is chosen as a case to simulate the development trends under the four paths. Finally, the most appropriate path for the high-quality development of private universities is determined.

Subsystem division and system framework

According to the theory of system analysis, the development system of private universities is an artificial, open and dynamic system with specific functions that is subordinate to the higher education development system. The development system of the private sector consists of four subsystems, including students, teachers, finance and quality. Each subsystem has a certain structure and order, and it interacts with and influences the other subsystems. The framework of the system is shown in Fig. 1. The relations among subsystems are outlined as follows. Students are the targets of teachers’ education. The student subsystem provides the financial subsystem with funds to run the school by paying tuition income, accommodation income and other expenses and influences the financial subsystem by consuming funds through various instructional expenditures. The financial subsystem provides human resource funding for the teacher subsystem and school operation funding for the student subsystem and the quality subsystem. In other words, the financial subsystem provides financial security for teachers’ salaries, benefits trainings, and student education. The teachers subsystem provides education and teaching services for the students subsystem and consumes the salaries and benefits of the financial subsystem. The improvement in the quality subsystem can attract a certain number of students and teachers and consume funds.

Fig. 1: Development system framework of private universities.
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Framework is based on the analysis of literature and the development system of private universities.

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System structure index analysis

The state variables, rate variables, auxiliary variables, constants and other relevant variables of each subsystem are determined according to the structure of the development system of private universities, the constituent elements and the accessibility of historical data.

Student subsystem

The student subsystem is the core subsystem of the development of private universities. Compared with public universities, private universities are more directly subject to the student market in terms of survival and development. It can be said that the student population is vital for the survival and development of private universities (Wang, 2017). The student subsystem in this study mainly concerns the impact of changes in the number of students on the finances and faculty of private universities. In this study, the number of students is chosen as the state variable of the student subsystem. The numbers of freshmen and graduates are rate variables. The growth rate of students, the proportion of graduates among students, the number of dropouts and the number of transfers are constant.

Financial subsystem

The financial subsystem is a centralized reflection of the income and expenditure of private universities and provides funds for the universities’ development. Income provides a financial guarantee for the development of private universities, while expenditure is the centralized reflection of the consumption of funds. The challenges associated with a single source of funding have long plagued the majority of private universities in China (Shen and Jia 2018). The average education income of private undergraduate institutions is only RMB 10,900 per student, which is far lower than the RMB 14,500 of newly built public undergraduate institutions. The lack of funding seriously affects the improvement in education quality. In practice, the main sources of income from private universities include tuition income, accommodation income, service income, scientific research funds, donation income and a small amount of government financial allocation. The main expenditures of private universities include daily administrative expenditures, land costs, capital construction expenditures, teaching expenditures, enrollment costs, tax expenditures, etc. The financial subsystem of this study mainly considers the impact of financial changes on students and teachers in private universities. Based on the quasienterprise nature of private universities and referring to the Enterprise Accounting Standards, this study selects financial surplus as the state variable of the student subsystem. Accounting income and accounting expenditure are selected as the rate variables of the financial subsystem. Tuition income, accommodation income, government financial allocation, daily administrative expenditure, land cost and teaching expenditure are auxiliary variables. The tuition growth rate, service income, daily administrative expenditure growth rate, land area, transfer fees, capital construction expenditure, teaching expenditure growth rate, enrollment cost, and tax expenditure are constant. In addition, private universities have a certain amount of research funds and a small amount of social donations every year, but the survey found that most of the research funds of private universities are used for teachers to engage in research activities, while a small amount of social donations are used to fund scholarships allocated to outstanding low-income students, so the two types of income are not included in the accounting income.

Teacher subsystem

The teacher subsystem is the human guarantee for the development of private universities in China. The professional attractiveness of private university teachers is seriously inadequate in China (Lu and Li, 2020), and the overall level of teachers directly determines the quality level of private universities (Liu et al. 2021). The teacher subsystem in this study mainly considers the impact of teacher turnover on the financial subsystem of private universities. In this study, the number of current full-time teachers is selected as the state variable of the teacher subsystem. The number of teachers introduced and the number of teachers leaving are rate variables. The growth rate of teachers is an auxiliary variable. The teacher turnover rate and number of retired teachers are held constant.

Quality subsystem

The quality subsystem is an important guarantee for the sustainable development of private universities. The high-quality development of private higher education in China has long faced many challenges (Wang and Wang, 2022). In the new era, private universities urgently need to gather strength to achieve high-quality development (Zhong, 2022). The quality subsystem of this study mainly concerns the impact of school quality improvement on the student, teacher and financial subsystems of private universities. In this study, the quality evaluation index is selected as the state variable of the quality subsystem; the growth rate of the quality evaluation index is a constant.

System dynamics model of private university development

The system dynamics model of private university development is established by synthesizing the theory and method of system dynamics, as shown in Fig. 2. These four subsystems are interrelated and used by each other, which is mainly reflected in the following: the increase in the number of students yields the school accounting income, requires an increase in the number of teachers and increases accounting expenditure. The increase in accounting income and financial surplus provides funds for the school to introduce teachers, expand the number of full-time teachers and increase the expenditure of the school. The increase in the number of students in school and full-time teachers available results in an increase in accounting expenditures. The growth of the quality evaluation index leads to increases in the number of new students enrolled, the number of introduced teachers and accounting expenditure.

Fig. 2: System dynamics model of private university development.
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Model is based on subsystem analysis, and is drawn using Vensim PLE software.

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In Fig. 2, there are 33 relevant variables in the development system dynamics model of private universities, including 4 state variables, 6 rate variables, 7 auxiliary variables and 16 constants, as shown in Table 1.

Table 1 Main variables of the development system model of private universities.
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Since data on the financial subsystem of private universities are difficult to obtain, this study chooses K University, which the authors have been investigating in depth for a long time, as a case study for simulation. K University is located in western China. It has a long history of 2 decades. The educational conditions have been improving, its unique educational characteristics are beginning to emerge, and its level of operation and social reputation are increasing. In Y province, K University has been included among the “private undergraduate institutions with advantageous characteristics” and in the first batch of “model institutions for training applied undergraduate talents”. Through the dynamic simulation analysis of the development system model of K University, the development trends under the 4 paths available to private universities can be predicted.

Model testing

In this study, the model was tested by using the historical test method. As 2019 is the initial year, the time step is set to one year. The development trend of K University’s development system from 2019 to 2021 was simulated, and the errors between the simulation results of several major variables and the real data of several major variables in the Annual Undergraduate Teaching Quality Report of K University from 2019 to 2021 were compared. The error formula is shown in Eq. (1), where Dij represents the error, Xij’ represents the model simulation results, Xij represents the real data, I represents the year, and J represents the primary variable.

$$Dij = \frac{{\left| {X_{ij}^\prime - X_{ij}} \right|}}{{X_{ij}}} \times 100\%$$
(1)

The error range of the simulated and real values is shown in Table 2. The analysis shows that the error range of both is between −2.02 and 6.93%, which is less than 10.0%; therefore, the model has high realism and validity and can be used to predict the development trend of private universities.

Table 2 Model test.
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Path design, simulation results and path selection

Path design

During the “14th Five-year Plan”, the development of high quality became the development direction of private universities (Wang and Dong, 2021; Wei and Zhang 2021; Zhong, 2022). Based on the perspective of high quality, this study addresses the information asymmetry regarding not-for-profit or for-profit considerations when high school graduates apply to private universities, and it considers the reality that teacher turnover rates at some private universities have fallen below 5% (Zhou and Liao, 2021). These aspects suggest that the choice between the not-for-profit and for-profit orientations has little effect on students’ willingness to enroll and teachers’ willingness to stay at private universities. In view of this, four financial parameters, namely, government financial allocation, tuition growth rate, land cost and tax expenditure, are selected as control variables that have a significant impact on the quality development of private universities. The study’s analysis of the advantages and disadvantages of the not-for-profit and for-profit orientations for private universities suggests that the advantages of not-for-profit private universities are the low land cost and more supportive policy, and the disadvantages are the inability to obtain benefits and the variability of tuition income. The advantages of for-profit private universities are the legalization of profit and autonomy regarding tuition fees, while the disadvantages are high land cost and low policy support. Based on this, four paths are designed for simulation: steady development of not-for-profit management, rapid development of not-for-profit management, steady development of for-profit management, and rapid development of for-profit management. The parameters of the control variables of the four paths are shown in Table 3.

Table 3 Control variables and path design.
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Path 1 regards the path of steady development of not-for-profit management. The starting point of this path is not to obtain income from school operations or to obtain tax benefits. According to Article 19 of the Amendment in China, the organizer of a not-for-profit private university shall not obtain income from school operations, and the surplus of the operation shall be used for the school’s quality improvement. Many scholars are concerned about the tax preference of not-for-profit private universities (Zheng and Zhou, 2022; Shen et al. 2018). Article 47 of the Amendment stipulates that not-for-profit private universities enjoy the same preferential tax policies as public universities. The service income of not-for-profit private universities can be taxed at 6%, and other income enjoys tax reduction and exemption.

Path 2 is the rapid development of not-for-profit management. On the basis of path 1, the variable of government financial allocation is added into path 2. Many scholars have highlighted the necessity and rationality of government financial allocation for not-for-profit private universities (Fang, 2016). Article 52 of the Implementation Regulations clearly states that priority support is given to not-for-profit private universities. Some provinces have implemented financial allocations for not-for-profit private universities. For example, C province allocates funds to private undergraduate universities at the rate of RMB 1400–2000 per student every year; S province allocates funds to private universities at the rate of RMB 500–1200 per student every year. Y Province has allocated RMB 20 million per year in special funds to support the development of private education since 2009, and the amount increased to RMB 50 million in 2014 and to RMB 100 million in 2015. With the promotion of the policy of classification management for private universities in Y province, it is assumed that private universities choose to be not-for-profit because they can then enjoy the government financial allocation of RMB 1000 per student every year.

Path 3 is a steady development of for-profit management. The starting point of this path is to increase tuition income, land cost and tax expenditure. According to legislation, private universities can keep part of the school surplus for profit under the premise of ensuring the quality of school operation (Zhou, 2012; Jin and Wang, 2016). Article 16 stipulates that for-profit private universities set their own fee standards. From 2015 to 2021, tuition fees increased by an average of RMB 1167 per year, or 7.78%, in 9 private undergraduate universities in Y Province. The increases adopted by not-for-profit private universities were the same as those of public universities. From 2011 to 2021, the tuition of public universities in province Y did not increase. In 2022, the annual tuition for a general undergraduate at a private university in Y Province was RMB 22,000, while the annual tuition for a general undergraduate at a public university ranged from RMB 3400 to RMB 5000. The difference between the two is more than 4 times. There is no doubt that private universities have high tuition income, which entails a high financial burden for students and their parents; therefore, the tuition growth rate for not-for-profit private universities is assumed to be 0. The increase in land cost is 0. According to the provisions of the land use policy in the Implementation Regulations, the significant increase in the cost of land for for-profit private universities will inevitably lead to accounting expenses. It is assumed that the land cost of a for-profit private university is paid in installments over ten years. Not-for-profit private universities enjoy the same land use policy as public universities, with no increase in land use costs. The next variable concerns the increase in tax expenditure. Article 47 of the Amendment requires that private universities enjoy preferential tax policy stipulated by the state, but it is rather vague and varies in different provinces. It is assumed that for-profit private universities pay taxes amounting to 6% of accounting income. According to Article 46 of the Implementation Regulations, 10% of the financial surplus should be used for the development of the university, and the remaining financial surplus can be distributed as profit.

Path 4 concerns the rapid development of for-profit management. The increases in tuition income, land cost and tax expenditure under this path are all the same as those under path 3. The difference between path 4 and path 3 is that the investors of private universities give up the allocation of school income and use the financial surplus to invest in school operation to rapidly improve the quality of the school.

Simulation results

Vensim PLE software is used to simulate the 4 development paths to obtain the potential development trends of K University in 2022 and 2031. The results are shown in Table 4.

Table 4 Development trends of K university under different paths.
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Considering the for-profit and not-for-profit nature of private colleges when designing the development path, the choice of registration does not have a significant impact on students’ willingness to apply or teachers’ willingness to stay. Therefore, the values of the number of students, freshmen enrolled, graduates, and teacher turnover are the same for K University under the four development paths. By 2031, there are 21,778 students, 5488 freshmen enrolled, 5257 graduates and 72 leaving teachers at K University. According to the design of the 4 paths, there are significant differences in government financial allocation, land cost and tax expenditure at K University. The government financial allocation for path 2 is adjusted with the number of students, ranging from RMB 19.478 million to RMB 20.7783 million per year, and the government financial allocation for path 3 and path 4 is 0. The land cost for paths 1 and 2 is 0, and the average annual land cost for paths 3 and 4 is RMB 42,348,900. The tax expenditure for paths 1 and 2 is RMB 3 million, and the tax expenditure for paths 3 and 4 ranges from RMB 34,217,300 to RMB 36,301,300.

Path 1 represents the steady development of the not-for-profit orientation. Between 2022 and 2031, the number of introduced teachers at K University will increase from 112 to 213, and the number of current full-time teachers will increase from 1000 to 1805. Tuition income will increase from RMB 428.516 million in 2022 to RMB 457.122 million in 2031; accounting income will increase from RMB 53.695 million in 2022 to RMB 569.457 million in 2031, an increase of RMB 32.5007 million; and accounting expenditure will increase by RMB 93.271 million, from RMB 358.126 million in 2022 to RMB 451.392 million in 2031. The financial surplus will increase from 0 yuan in 2022 to 140.236 million yuan in 2031. This indicates that under the path of rapid development of the not-for-profit orientation, the teaching staff, tuition income, accounting expenditure and financial surplus of K University will steadily increase. With the institutional constraint that all of the school surplus is used to operate the school, K University will accumulate a school development fund of RMB 140,236,000.

Path 2 regards the rapid development of the not-for-profit orientation. Between 2022 and 2031, the number of introduced teachers at K University will increase from 112 to 214, and the number of current full-time teachers will increase from 1000 to 1807. The change in tuition income is the same as that in path 1, with accounting income increasing from RMB 556.428 million in 2022 to RMB 590.236 million in 2031, an increase of RMB 33.88 million. Accounting expenditures will increase from RMB 364.331 million in 2022 to RMB 465.475 million in 2031, an increase of RMB 101.174 million. The financial surplus will increase from an assumed value of 0 million in 2022 to 491.22 million yuan in 2031. This indicates that K University’s teaching staff, tuition income, accounting expenditure and financial surplus steadily increase when path 2 is adopted. With the institutional constraint of using all of the school’s surplus to operate the school, K University obtains a cumulative school development fund of RMB 1491.22 million.

Path 3 represents the steady development of the for-profit orientation. Between 2022 and 2031, the number of introduced teachers at K University will increase from 112 to 210, and the number of current full-time teachers will increase from 1000 to 1798. Accounting income will increase from RMB 570.289 million in 2022 to RMB 605.021 million in 2031, an increase of RMB 34.732 million; accounting expenditure will increase by RMB 102.368 million, from RMB 437.867 million in 2022 to RMB 540.235 million in 2031. Tuition income will increase from RMB 461.855 million in 2022 to RMB 492.687 million in 2031; and the financial surplus increases from the assumed value of 0 in 2022 to RMB 951.514 million in 2031. This shows that under the steady development of the for-profit path, the tuition income, expenditure accounting and financial surpluses of K University are steadily increasing, and 10% of the financial surplus is withdrawn for school development according to Article 46 of the Regulations, which may be allocated to the remaining financial surplus. The development fund of K University under path 3 is RMB 95,151,400, which is only 6.79% of that yielded under path 1 and 6.38% of that under path 2.

In the case of rapid development of the for-profit orientation under path 4, the values of each parameter of path 4 are the same as those from path 3, with the difference that the investor gives up the allocation of school income and uses all the financial surplus to invest in school operation to rapidly improve the quality of school operation; therefore, by 2031, the total development funds of path 4 will reach RMB 951.514 million for K University, which is 67.9 and 63.8% of the development funds yielded under path 1 and path 2, respectively.

Path selection

To present the development status of K university under four different paths from 2022 to 2031 in a more intuitive way and facilitate the selection of development paths for private universities, the article analyses the simulation results of the four development paths of the university from five aspects: tuition income, accounting income, accounting expenses, financial surplus, and educational investment, as shown in Figs. 3–6.

Fig. 3: Simulation results of tuition income at K university.
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Plotted using simulated data by K Private University.

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Fig. 4: Simulation results of accounting income at K university.
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Plotted using simulated data by K Private University.

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Fig. 5: Simulation results of accounting expenditure at K university.
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Plotted using simulated data by K Private University.

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Fig. 6: Simulation results of financial surplus at K university.
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Plotted using simulated data by K Private University.

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Figure 3 shows that from the simulation results of tuition income, paths 1 and 2 have the same tuition income, and paths 3 and 4 are better than paths 1 and 2. Based on the annual tuition growth rate of 7.8% for private universities in Y Province, this study estimates that from 2022 to 2031, tuition income increases by RMB 33.339–35.565 million per year under path 3 and path 4 compared to path 1 and path 2. It can be seen that for-profit selection is beneficial to the tuition income of private universities.

Figures 4 and 5 show that from the simulation results of accounting income, path 3 and path 4 are better than path 2, and path 2 is better than path 1. From 2022 to 2031, the accounting incomes of path 3 and path 4 exceed that of path 2 by RMB 13.861 million and RMB 14.785 million, and the accounting income of path 2 exceeds that of path 1 by RMB 19.478 million to RMB 20.779 million. It can be seen that for-profit selection is beneficial to the increase in accounting income, while the rapid development of the not-for-profit path is more beneficial to the increase in accounting income than the steady development of the not-for-profit path.

From the simulation results of accounting expenditures, there is little difference between the accounting expenditures of path 1 and path 2, and by 2031, the difference is RMB 14.083 million; that is, the accounting expenditures of path 2 are RMB 14.083 million higher than those of path 1. The accounting expenditures of paths 3 and 4 are higher than those of paths 1 and 2. From 2022 to 2031, the accounting expenditures of paths 3 and 4 are RMB 88.843 million higher than that of path 1 and higher than that of path 2 by RMB 74.76 million. Paths 3 and 4 may lead to an increase in accounting expenditure.

Figure 6 shows that from the simulation results of financial surplus, path 2 is better than path 1, and path 1 is better than path 3: from 2022 to 2031, the financial surplus of path 2 exceeds that of path 1 by RMB 13.303 million to RMB 88.86 million. The financial surplus of path 1 exceeds the values for paths 3 and 4 by RMB 46.403 million to RMB 45.086 million, and the financial surplus of path 2 exceeds the values for paths 3 and 4 by RMB 59.706 million. It can be seen that the not-for-profit orientation is beneficial to the increase in financial surplus, and rapid development is more beneficial than steady development to the increase in financial surplus.

School factor inputs under the 4 development paths are shown in Table 5 and Fig. 7. From the perspective of school factor inputs, path 2 is better than path 1, path 1 is better than path 4, and path 4 is better than path 3. From 2022 to 2031, the input of path 2 exceeds that of path 1 by RMB 7.1 million to RMB 13.303 million per year, the input of path 1 exceeds that of path 4 by 46,403 million yuan to 52.942 million yuan per year, and that of path 4 exceeds that of path 3 by RMB 67.0752 million to RMB 119.1789 million per year.

Table 5 Input trend of K university under different paths.
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Fig. 7: Simulation results of school operation investment at K university.
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Plotted using simulated data by K Private University.

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Path 2 presents the largest investment in school operation, followed by path 1, path 4 and path 3. In other words, the rapid development of a not-for-profit orientation that enjoys government financial allocation yields the largest investment. The steady development of a not-for-profit orientation that does not enjoy government financial allocation yields the second largest investment. The rapid development of a for-profit orientation that gives up profit allocation yields the third largest school operation investment. The steady development of a for-profit orientation to obtain educational benefits requires minimal investment in education.

In summary, tuition income and accounting income for K University are higher under the steady development and rapid development paths with a for-profit orientation than under the steady and rapid development paths with a not-for-profit orientation. However, the annual land cost is RMB 42,344,900, and the annual tax expense is RMB 34,217,300 to RMB 36,301,300 under the not-for-profit path and the for-profit path. Therefore, the annual accounting expenses are higher under the latter, and the financial surplus under both path 2 and path 1 is greater than that under path 3 and path 4. It is easy to see that the increase in tuition income for universities adopting the for-profit orientation does not cover the increase in land cost and tax expenditure.

Conclusions and implications

Conclusions

Given the analysis, the choice of private universities to register as not-for-profit or for-profit has little impact on students’ willingness to enroll and teachers’ willingness to stay. There is no difference in the number of university students, freshmen enrollment, number of graduates and number of leaving teachers at K University under the 4 paths. However, there are significant differences in tuition income, accounting income, accounting expenditure, financial surplus and school operation investment under the 4 paths because of differences in tuition growth rate, government funding, land cost and tax expenditure.

Path 3 and path 4 have obvious advantages in increasing tuition income, but the increase in tuition income cannot compensate for the increase in land cost and tax expenditure, resulting in higher accounting expenditure than under paths 1 and 2 and lower financial surplus than under paths 1 and 2. In addition, path 1, path 2, and path 3 are all legally bound. Path 1 and path 2 use all of their surplus to run their schools, while path 3 retains 10% of the financial surplus for school development. By 2031, the cumulative school development funds under path 1 and path 2 will be RMB 140.236 million and RMB 140.9122 million, respectively, and the cumulative school development fund under path 3 will be RMB 95.1514 million. The accumulated school development fund under path 4 will RMB 951.514 million, which is 67.9% of the value under path 1 and 63.8% of the value under path 2. Therefore, the study concludes the following:

Differences in tuition growth rate, government financial allocation, land cost and tax expenditure under the 4 paths lead to distinct differences in the development trends of K University.

The for-profit development paths can increase tuition income. However, the increase in tuition income cannot compensate for the increase in land costs and tax expenditures, resulting in higher accounting expenditures and lower financial surplus than under the not-for-profit development path.

Based on the above, it can be concluded from the perspective of financial surplus and school operation investment that the rapid development of the not-for-profit path, which enjoys government financial allocation, is more conducive to the high-quality development of private universities than the other three paths.

Implications

Based on system dynamics, this study studies the choice of private universities in China regarding the not-for-profit and for-profit orientations to achieve high-quality development. Restricted by the system dynamics method, one case is selected in the study. It is concluded that the rapid development of a not-for-profit path that enjoys government financial allocation is more conducive to the high-quality development of private universities. This article may provide a reference for private universities in China regarding the choice between the not-for-profit and for-profit orientations and for the reform of private universities in other developing countries. According to the simulation results of the rapid development of the not-for-profit path, the following 3 strategies are proposed.

Encourage private universities to choose the not-for-profit orientation. The data from the National Statistical Bulletin on the Development of Education in 2021 show that private universities account for 25.37% of the total number of universities and 24.19% of the total number of students in China (National Statistical Bulletin on the Development of Education in 2021, 2022). The high-quality development of higher education in China is inseparable from the high-quality development of private universities. According to the simulation results of K University under the 4 paths, the financial surplus and the school investment of the not-for-profit paths are much larger than those of the for-profit path, regardless of whether private universities enjoy government financial allocation. Therefore, effective means for improving the quality of private higher education include reasonably setting the “management right” and the remuneration structure of stakeholders of not-for-profit private universities; expanding the autonomy of not-for-profit private universities in running schools and setting professional standards; implementing supporting policies, such as land allocation, tax deduction and exemption for not-for-profit private universities, in the Amendment and the Implementing Regulations; and encouraging private universities to choose the not-for-profit orientation in a multipronged manner.

Increasing government investment in not-for-profit private universities is beneficial for expanding the participation rate of the general public in higher education (Marginson, 2011). Financial investment in private higher education in China has continued to grow, but funding is still insufficient. Under the trend of high-quality development, there is an urgent need to increase government investment in the operation of not-for-profit private universities and guide private universities to rapidly develop under the not-for-profit orientation. Compared with public higher education institutions, private higher education institutions are underfunded and of low quality. One study found that the average teaching expenditures of public and private undergraduate universities in Sichuan Province are RMB 4112.79 and RMB 1963.71, respectively, with the expenditures of public universities being more than double those of private universities. Moreover, the average teaching expenditures of private undergraduate institutions in the more economically developed provinces of Zhejiang and Jiangsu were only RMB 2303.79 and RMB 1776.63, respectively (Yuan et al. 2021). In recent years, the crisis of student sources has become a buzzword in higher education, and many higher education institutions in some provinces even have “zero enrollment” (Wang and Shen, 2020). If private universities cannot significantly improve in quality in the short term, they will bear the brunt of the trend of decreasing student enrollment and become the most affected group of universities. In contrast, under the development trend of path 2, it is assumed that K University enjoys a financial allocation of RMB 1000 per student every year, which is approximately RMB 19.478 million to RMB 20.778 million per year. The simulation results show that the financial surplus of K private university under path 2 ranges from 134.58 million yuan to 192.127 million yuan per year, with a relatively high proportion of annual per capita government financial allocation, accounting for approximately 10.81–14.47% of the annual financial surplus. The government’s increased investment in not-for-profit private universities will surely help address the actual dilemma of a single source of funding and effectively enhance the quality of not-for-profit private universities.

Regarding the strengthening of the financial supervision of not-for-profit private universities, it is a common practice internationally to regulate not-for-profit private universities (Galle and Walker, 2016). The Amendment and the Implementation Regulations provide a legal basis for the development funds of private universities, but effective supervision of finance is an important guarantee for the sustainable development of private universities. The core of classification management is differentiated support, and several provincial governments have gradually implemented financial allocations to not-for-profit private universities. The government should organize the annual audit and supervision of funds, clarify the financial allocation and flow of funds, and announce the audit results to the public. The funds allocated to not-for-profit private universities with unqualified audit results should be reduced or canceled for the next year to ensure the reasonable use of funds. In addition, the financial supervision of not-for-profit private universities should be strengthened, and the supervision of surplus funds should be enhanced to ascertain whether they are recorded in the accounts and used entirely for school operation in accordance with the law. Not-for-profit private universities are prohibited from carrying out profit-making activities by definition. In this way, the average student teaching expenditure of such universities may reach or even exceed the average student teaching expenditure of provincial public universities, and high-quality development is just around the corner.