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EFFICIENCY ANALYSIS of NON-PROFIT YOUTH WORK ORGANISATIONS in ESTONIA Bachelor’S Thesis Programme International Business Administration, Specialisation Finance

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EFFICIENCY ANALYSIS of NON-PROFIT YOUTH WORK ORGANISATIONS in ESTONIA Bachelor’S Thesis Programme International Business Administration, Specialisation Finance TALLINN UNIVERSITY OF TECHNOLOGY School of Business and Governance Department of Economics and Finance Aivar Kamal EFFICIENCY ANALYSIS OF NON-PROFIT YOUTH WORK ORGANISATIONS IN ESTONIA Bachelor’s thesis Programme International Business Administration, specialisation Finance Supervisor: Simona Ferraro, PhD Tallinn 2021 I hereby declare that I have compiled the thesis independently and all works, important standpoints and data by other authors have been properly referenced and the same paper has not been previously presented for grading. The document length is 10,068 words from the introduction to the end of conclusion. Aivar Kamal …………………………… (signature, date) Student code: 185038TVTB Student e-mail address: [email protected] Supervisor: Simona Ferraro, PhD: The paper conforms to requirements in force …………………………………………… (signature, date) Chairman of the Defence Committee: Permitted to the defence ………………………………… (name, signature, date) TABLE OF CONTENTS ABSTRACT .................................................................................................................................... 4 LIST OF ABBREVIATIONS ......................................................................................................... 5 INTRODUCTION ........................................................................................................................... 6 1. EFFICIENCY OVERVIEW AND MEASUREMENTS ........................................................ 8 1.1. Efficiency concept ............................................................................................................ 8 1.2. Efficiency measurement techniques of non-profit organisations.................................... 11 1.2.1. Efficiency measurement using financial ratios approach ........................................ 11 1.2.2. Data Envelopment Analysis .................................................................................... 14 1.3. Efficiency measurement problems of non-proft organisatsions ..................................... 17 2. NON-PROFIT YOUTH WORK ORGANISATIONS .......................................................... 19 2.1. Legal framework of non-profit youth work organisations in Estonia ............................. 19 2.1.1. Selection of the organisations for the study............................................................. 21 3. DATA ENVELOPMENT ANALYSIS (DEA) ..................................................................... 24 3.1. Main assumptions about the analysis .............................................................................. 24 3.2. Choice of inputs, outputs and model............................................................................... 25 3.3. Conduction of DEA analysis .......................................................................................... 30 3.4. Results of DEA analysis and their interpretation ............................................................ 31 4. RESULTS AND LIMITATIONS OF THIS STUDY ........................................................... 34 CONCLUSION ............................................................................................................................. 36 LIST OF REFERENCES............................................................................................................... 37 APPENDICES ............................................................................................................................... 42 Appendix 1. Type, description of studied organisation and funding received for 2019 ........... 42 Appendix 2. Data for DEA analysis from year 2019 annual financial reports .......................... 45 Appendix 3. Pearson correlation matrix of general information, efficiency score, inputs and outputs for organisations ........................................................................................................... 46 Appendix 4. Instruction file for DEA analysis .......................................................................... 47 Appendix 5. Output file ............................................................................................................. 48 Appendix 6. Non-exclusive licence ........................................................................................... 61 3 ABSTRACT Researches related to the efficiency performance of for-profit businesses are common enough. The analysis of non-profit organisations have so far been quite scant as it is difficult to find the right approach to the measurement of efficiency of organisations, which main aim is to benefit the society rather than to make a profit. Efficiency measurement is one of the key factors that reflects how well an organisation uses resources to achieve its core purpose of existence and mission. This thesis presents various methods for assessing the efficiency of non-profit organisations. The study focuses on 16 nationwide youth work organisations that are strategic partners of the Estonian Ministry of Education and Research and which receive an annual grant from this institution. The output-oriented Data Envelopment Analysis is used as a main measurement tool. In the course of the study, it turned out that 8 out of 16 organisations are ineffeciently using their resources and the author emphasizes which parameters should be improved by organisations. This is, moreover, the first study of its kind in Estonia. Keywords: non-profit organisations, youth associations, efficiency measurements, Data Envelopment Analysis 4 LIST OF ABBREVIATIONS 4H – Youth Association Estonia 4H (Noorteühing 4H) AE – Allocative Efficiency ANK – Association of Estonian Open Youth Centers (Eesti Avatud Noortekeskuste Ühendus) BCC – Banker, Charnes and Cooper model CCR – Charnes, Cooper and Rhodes model CRS – Constant Returns to Scale DEA – Data Envelopment Analysis DMU – Decision-making unit EE – Economic Efficiency EGL – Estonian Association of Girl Guides (Eesti Gaidide Liit) EHKL – Estonian Hobby Schools Union (Eesti Huvikoolide Liit) EKSL – Estonian School Sport Union (Eesti Koolispordi Liit) EKKL – Estonian Art Schools Union (Eesti Kunstikoolide Liit) EML – Estonian Music School Union (Eesti Muusikakoolide Liit) ENK – Estonian Association of Youth Workers (Eesti Noorsootöötajate Kogu) ENL – Estonian National Youth Council (Eesti Noorteühenduste Liit) ESÜ – Estonian Scout Association (Eesti Skautide Ühing) ETHL – Estonian Dance Hobby Education Union (Eesti Tantsuhuvihariduse Liit) EVS – Estonian Debate Society (Eesti Väitlusselts) EÕEL – Estonian School Student Councils' Union (Eesti Õpilasesinduste Liit) EÜL – Federation of Estonian Student Unions (Eesti Üliõpilaskondade Liit) HTM – Ministry of Education and Research NPO – Non-profit organisation NTS – Youth Work Act of Estonia TE – Technical Efficiency TEAHU – Estonian STEM Education Union (Eesti Teadushuvihariduse Liit) TORE – Youth Association TORE (Noorteühing Tugiõpilaste Oma Ring Eestis) VRS – Variable Returns to Scale 5 INTRODUCTION The nature of economic activity in Estonia, as in many other countries, can be defined by 2 types: commercial (or for-profit activity) and non-commercial (or non-profit). For-profit activity implies to the presence of profit (or loss), which is distributed among shareholders and typically, this type of activity describes companies (Duska 1997). In the case of non-profit activities, a similar to for- profit activities сoncept of profit called “net surplus” (or “net deficit”) may arise, but it cannot be distributed among the members of the non-profit organisation (NPO) and can only be directed towards the future development of the organisation. This statement is also confirmed by § 1 subsections 1 and 2 of the Non-profit Associations Act of Estonia. The same act specifies that NPO are voluntary associations, the purpose of which is not to earn an income from economic activities (MTÜS § 1). In the context of this thesis, the words "organisation" and "association" are used interchangeably, although some may disagree with this wording1. The condition of non-distribution of profits deprives NPOs of the natural measurement of efficiency arising from the goals of such organisations, and significantly complicates the analysis of NPO efficiency (Borisova, Polishhuk 2009, 80). In addition, since NPOs typically do not operate in a competitive output market, measures such as net income or ratio analysis do not provide an indication of operational efficiency (Nunamaker 1985, 50). For the author of this thesis, the topic related to methods of assessing the efficiency of NPOs is of particular interest, since there are difficulties in assessing their efficiency and comparing them with each other. Moreover, measuring performance in NPOs has received relatively little attention compared to assessing the efficiency of commercial organisations (Kim, Lee 2018, 166) and this is one of the first attempts to evaluate how efficient some Estonian NPOs are. Moreover, the author has worked for a similar organisation for several years. Given that the analysis of the entire NPOs’ sector of Estonia is a vast task, which requires tremendous amount of time and resources, the 1 The author prefers to use the word “organisation” instead of “association”. Some officially established terms include the word “association” and therefore both words appear in the thesis. 6 author wants to focus on research and application of methods for assessing efficiency in the sector of youth work NPOs. The aim of the study is to present various methods for assessing the efficiency
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