No. 46




Investment into Higher Education and Its Projected Profitability in Estonia

14 December 2022


RiTo No. 46, 2022

  • Kadri Männasoo

    Professor of School of Business and Governance, Department of Economics and Finance, Tallinn University of Technology

Countries are not defined only by their population numbers and territory, but also by the level of human development they exhibit and the quality with which this is managed.

Higher education plays a major role in contributing to both. The accumulation of human capital in higher education is a time consuming and expensive process that can be measured as a long-term investment from the perspective of both the individual and the society. Despite the fact that public opinion places a high subjective value on higher education, there are three crucial factors that obstruct sufficient state funding for universities: the lack of compelling evidence about the positive returns to higher education; the unforeseeable future risks of investing into higher education; and the allocation of costs and benefits of public higher education in a way that counteracts the redistribution and may even widen the income disparities in the society.

By concurrently optimising the revenue from the investments into higher education made by the individual as well as the government in its capacity as the representative of the society, we see that the expected rate of revenue is positive for both sides and that its volume, 7.5 and 8.6 percent respectively, surpasses the long-term performance of international stock markets. By adding to the direct income and tax interests of higher education also indirect benefits from the healthier, more conscious, democratic, and secure individual and society with a higher potential for development, the expected profit rate of higher education increases to nearly 20 percent for the individual and to nearly 17 percent for the government and the society. Simulation analysis shows that the profitability of higher education depends largely on the efficiency with which universities contribute to the value creation abilities of the students. The more profitable the knowledge and skills capital of a university graduate and the higher its price as expressed in the salary bonus on the labour market, the higher is the revenue from higher education both for graduates as well as the society – and particularly to the latter. The more efficient higher education is and the more it creates value, the higher is the contribution of new students themselves in terms of time and finances, and the more the society wins in terms of saving public funds and receiving higher tax revenue from the higher future salaries. This shows that a well-functioning higher education that does in actual fact offer a new quality is an asset for the whole society. The objective of the policy on higher education is to create incentives that motivate new students in higher education to fully apply themselves and concentrate on their studies, while motivating the universities to share their knowledge and skills in the best way they can but demanding a lot in return as well.