Does Within-Source Diversification Impact Nonprofit Outcomes?

• In Event: Emerging Research on the Nonprofit Sector

Abstract

Extant scholarship remains divided on whether nonprofit organizations should diversify or concentrate on a limited set of funding streams to achieve better organizational outcomes. Studies informed by Modern Portfolio Theory contend that diversification reduces exogenous fiscal shocks (see Hung & Hager, 2019) whereas sceptics warn that managing heterogeneous income sources imposes transaction costs and heightens the risk of mission drift (Froelich, 1999; Frumkin & Keating, 2011; Sacristán López de los Mozos, Rodríguez Duarte, & Rodríguez Ruiz, 2016; Weisbrod, 1998). This paper examines a third, under-examined strategy—within-source diversification (WSD)—whereby an organization concentrates on a single revenue category (e.g., grants) yet diversifies across multiple, thematically related channels within that category (e.g., federal, state, and municipal grants). We pose the research question: To what extent does WSD influence nonprofit organizations’ program outcomes?

Drawing on a panel of U.S. nonprofits from 2008 to 2018, we develop three Herfindahl-Hirschman Indexes (HHI) to capture WSD in grants, donations, and program revenues. HHI-grants include federal, state, county, city, foundation, and corporate grants. HHI-donations encompass four types of contributions: individual donations, board member donations, in-kind support, and other contributions. Finally, program revenue diversification includes seven streams of revenue: admissions, membership, subscriptions, single ticket sales, tuition, contracted services and other program-related income. Two-way fixed effects models show that diversifying within revenue categories significantly enhances program outcomes. For grants, nonprofits relying on a single funder experience a 23.2% reduction in program outcomes compared to those with perfectly diversified grant portfolios. Similarly, dependence on a single donation source correlates with a 32.1% decline in outcomes, while exclusive focus on one type of program revenue reduces outcomes by 25.7%.

These results offer several theoretical and practical implications. First, the study challenges the conventional diversification versus concentration dichotomy, advocating for a hybrid approach. Unlike traditional diversification, which prioritizes the level of diversification across unrelated revenue streams, WSD emphasizes relatedness by cultivating aligned revenue sources within a single category. This strategy balances risk mitigation with operational efficiency, reducing dependency on individual funders while leveraging existing expertise and infrastructure to achieve economies of scale (Foster & Fine, 2007; Kelly et al., 2024). Second, the study clarifies how WSD achieves efficiency. By focusing on related revenue streams, nonprofits minimize redundant investments in new skills or management systems. For example, grant-writing expertise developed for federal grants can be adapted for state or foundation proposals without incurring substantial startup costs. These operational synergies allows nonprofit organizations to stabilize their finances and focus on developing their programs and advancing their missions.

Authors

• Hala Altamimi, University of Kansas
  Presenting Author

• Qiaozhen Liu, Florida Atlantic University
  Non-Presenting Co-Author