Public research spending has soared, but demand for proof of impact is also on the rise. Performance-based funding (PBF) resolves this, tying a share of core budgets to demonstrable excellence while respecting institutional autonomy. This Viewpoint outlines PBF’s archetypes, benefits, and pitfalls, offering practical guidance for policymakers and stakeholders working to turn R&D outlays into strategic, innovation-driven dividends.
Scientific research requires substantial resources (financial, human, infrastructural, and institutional), making it an increasingly expensive and complex undertaking. Since World War II, governments worldwide have adopted research funding as a core function, recognizing knowledge as a fundamental driver of societal advancement and economic prosperity. According to Organisation for Economic Co-operative and Development (OECD) estimates, governments spent US $504 billion on R&D in 2023, an amount that nearly doubled over the past 20 years, reflecting an expanding commitment to R&D activities.
Modern public research funding ecosystems operate through three distinct yet interconnected channels (see Figure 1). First, institutional funding provides the foundation for research capacity and infrastructure. Second, grants and awards funding enable researchers to pursue specific investigations through research councils and similar bodies. Third, strategic initiative funding targets national priorities and emerging fields. Traditionally, institutional funding (the largest of these streams) was allocated based on historical patterns or simple input metrics such as student enrollment, with minimal connection to research outcomes or quality.
Today, research ecosystems worldwide are being reshaped by intensifying demands for accountability, productivity gains, and increased competition. With the quality of research output increasingly determining national competitiveness and resilience, governments are seeking more effective approaches to allocate their significant research investments.
PBF is a strategic response to these challenges. By linking a portion of institutional funding directly to measured research performance, PBF creates powerful incentives for excellence while preserving institutional autonomy in implementation. This approach complements rather than replaces competitive grants or strategic initiatives, ensuring that the substantial base funding that institutions receive drives continuous improvement across their research portfolio.
If well-designed, PBF addresses these demands by transforming research support into a strategic investment that fuels knowledge creation, talent development, and innovation-driven growth — paying dividends in economic resilience, societal well-being, and a nation’s long-term capacity to tackle future crises.
This Viewpoint explores how performance thinking entered research policy, the main approaches to PBF, what advantages it can unlock, the pitfalls that sometimes accompany it, and the considerations stakeholders should account for when designing or reshaping any research funding scheme.
Historically, governments around the world, particularly in Europe, provided research institutions with institutional funding based on historical factors and size, essentially as a block grant without conditions. These systems followed the Humboldtian university tradition, in which autonomous professors play a central role and collectively decide on institutional-resource allocation. As environmental historian Sverker Sörlin observed, such systems entailed little oversight or external evaluation of how resources were spent and what was achieved.
Higher education management consultant Marcel Herbst and Sörlin both note that, following World War II, many higher education systems faced increased international economic competition and tighter government budgets, prompting shifts in their managerial and funding paradigms. As documented by Daniele Checchi et al. in Higher Education Quarterly and Sörlin, these shifts often entailed a move toward performance-based regimes rooted in New Public Management (NPM), introducing PBF systems and business-oriented management practices.
NPM emphasizes efficiency, competition, and outcome-based measurement within public sector organizations. For research and innovation, this meant a move away from trusting institutions to allocate lump-sum budgets in favor of frameworks that track outputs and impacts. This laid the foundation for PBF.
PBF is used to allocate a portion of core institutional funding (also known as “recurrent” or “base” funding, which is often the largest share of a research institution’s revenue from public funding). Unlike its predecessor, PBF distributes resources based on rigorous assessments of performance through a dual-component structure: a comprehensive assessment process measuring research quality across multiple dimensions and a funding process that incorporates these assessments into allocation formulas. These evaluations may incorporate both quantitative indicators (publications, citations, and external funding success) and qualitative peer reviews, introducing a competitive element to institutional funding while maintaining the essential funding required for operation.
The UK’s RAE
The Research Assessment Exercise (RAE), introduced in the UK in 1986 under Prime Minister Margaret Thatcher, was the world’s first PBF system, replacing historically determined block grants with funding based on peer evaluation of research quality. RAE was introduced to concentrate limited resources on the strongest research programs at a time of severe public spending cuts and fears of a brain drain. Developed amid economic constraints, it aimed to preserve research excellence by avoiding indiscriminate cuts. This approach also aligned with growing demands for accountability in public expenditure.
Expert panels evaluated departments’ research outputs, and the results determined the allocation of “quality-related” research funding. Despite a relatively modest financial impact, RAE profoundly influenced institutional behavior through its effect on prestige and reputation. Over multiple iterations (from 1989 to 2008), the methodology became increasingly sophisticated before evolving into the Research Excellence Framework (REF) in 2014. This model has since been adapted by numerous countries, each implementing variants that reflect their contexts and priorities.
Having established the concepts and background of PBF systems, we next examine how these principles translate into practice. PBF systems vary considerably in their design and implementation, but three main approaches have emerged:
PBF systems are based on several assumptions: transparency in allocating public resources fosters public trust, competition sparks innovation, and aligning funding with performance helps institutions achieve national str
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