Budget Allocation as Innovation Policy? Untapped Potential in Mexico’s Higher Education System

This study analyzes the efficiency and productivity of Mexican state universities from 1989 to 2017, a period marked by significant reforms in higher education funding mechanisms. Using a methodological approach that combines direct and indirect (budget-constrained) sequential technology frontiers, we construct a Malmquist productivity index that decomposes efficiency into four components: direct technical efficiency change, direct scale efficiency, input allocative efficiency, and indirect frontier shift. This quadripartite decomposition allows us to calculate the GAIN function, measuring the additional efficiency that universities could achieve through better resource allocation within existing budget constraints. Our analysis of 34 public state universities reveals considerable heterogeneity in efficiency patterns, with productivity improvements primarily driven by technological advancement (frontier shifts) rather than better resource allocation. By 2017, universities could potentially improve their efficiency by 52% through optimized resource allocation alone, without requiring additional funding. Cluster analysis identifies distinct strategic groups among universities, with varying efficiency profiles and improvement opportunities. Our findings suggest that while Subject to Performance Budget (STP) programs introduced in the 1990s contributed to overall efficiency improvements, they have not necessarily led to better resource allocation decisions, as evidenced by increasing bureaucratization and staff-to-faculty ratios. These results have important implications for higher education funding policies in developing economies, suggesting that significant performance improvements could be achieved through better allocation decisions even within existing budgetary constraints.