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Journal of International Economics 79 (2009) 198–210
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Journal of International Economics
j ourna l homepage: www.e lsev ie r.com/ locate / j i e
When NGOs go global: Competition on international markets fordevelopment donations☆
Gani Aldashev a,1, Thierry Verdier b,⁎a University of Namur (FUNDP) and CRED, Belgiumb Paris School of Economics, France, University of Southampton and CEPR, United Kingdom
☆ The authors thank Jean-Marie Baland, Jean-PhilippeDe Benedictis, an anonymous referee, Jonathan Eaton (thof the CEPR RTN Final Conference on Trade, Industrializathe World Meetings of Public Choice Societies (AmstErasmus University Rotterdam, University of Urbino, auseful suggestions.⁎ Corresponding author. PSE, 48 Boulevard Jourda
+33143136308; fax: +33143136232.E-mail addresses: [email protected] (G. Ald
(T. Verdier).1 Department of Economics, 8 Rempart de la Vierge, 5
0022-1996/$ – see front matter © 2009 Elsevier B.V. Adoi:10.1016/j.jinteco.2009.07.007
a b s t r a c t
a r t i c l e i n f oArticle history:Received 28 September 2007Received in revised form 24 July 2009Accepted 24 July 2009
Keywords:Non-governmental organizationsCharitable givingFundraisingGlobalizationMultinational firms
JEL classifications:F23L22L31
Why are many large non-governmental organizations (NGOs) becoming multinational entities? What arethe welfare implications of this integration of markets for development donations? To answer thesequestions, we build a simple two-country model with horizontally differentiated NGOs competing infundraising. We find that NGOs become multinational if the economies of scale in fundraising are sufficientlylarge. In that case, national NGOs in the smaller country disappear, while some national NGOs remain in thelarger country only if country sizes are sufficiently different. Social welfare is higher in the regime withmultinationals than under autarky.
© 2009 Elsevier B.V. All rights reserved.
1. Introduction
“Unlike smaller organizations, the transnational NGO can demon-strate quickly and effectively to several constituencies at once thatits people are ‘on the ground’, responding to an emergency. CARE,for example, demonstrated simultaneously to television audiencesin Britain, the United States, Canada and Australia that it wasoperational only days after the 1992 disaster ‘broke’ in Somalia —
simply by changing the face and the accent in front of the camera”(Smillie, 1995: 202).
Along with increased international trade and investment flows,another key market integration phenomenon has been happening in
Platteau, Jakob De Haan, Lucae editor), and the participantstion and Development (Paris),erdam), and the seminars atnd University of Rome III, for
n, 75014 Paris, France. Tel.:
ashev), [email protected]
000 Namur, Belgium.
ll rights reserved.
the last decades: the globalization of the market for donations tocharitable causes. While until relatively recently development-oriented non-governmental organizations (NGOs) raised funds inthe countries where they had been founded, nowadays they heavilyrely on raising funds through their foreign affiliates. Table 1 showsstatistics for some of the main global NGOs: the number of distinctcountry offices that conduct national fundraising campaigns goesfrom 10 (for CARE) to 65 (for World Vision). These organizations aredevelopment heavyweights: their annual budgets are in the range of600 to 2100 mln U.S. dollars.
Concerning the timing of this phenomenon, Fig. 1 presents thehistorical timeline of the globalization for three well-known NGOs:Plan International, Oxfam, and MSF. We see that the main surge inglobalization (i.e., the opening of foreign affiliates) happened mainlyduring the 1980s and 1990s.
Geographical patterns behind this globalization phenomenon arealso quite interesting. Table 2 lists the MSF's affiliates and their yearsof foundation. The first foreign affiliates are in Belgium, Switzerland,and the Netherlands, with other European affiliates following in thesame decade. The first affiliate outside Europe is in the US, and inmid-1990s, theMSF expands its donor base into such exotic destinations asthe United Arab Emirates.
Why did these global NGOs emerge? Why did this phenomenondevelop mainly starting in the 1980s? What can explain thegeographical pattern of NGO globalization? And is this aid market
Table 1Data on some of the main global NGOs.Source: Lindenberg and Bryant (2001), Karajkov (2007), www.plan-international.org.
Organizationname
Yearoffoundation
Number ofdistinctcountryoffices
Total revenues,2006, US$ mln
Main fieldof operation
PLANInternational
1937 17 595a Children's rights
Savethe Children
1919 26 863 Children's rights
OxfamInternational
1942 13 528 Poverty relief
CARE 1945 10 624 Poverty reliefWorld Vision 1950 65 2100 Religious charityMedecins SansFrontieres (MSF)
1971 19 568 Medicalintervention indistress
a 2007.
Table 2The MSF's affiliates and their years of foundation.Source: Simeant (2005).
Year Affiliate
1971 France (headquarter)1980 Belgium1981 Switzerland1984 Netherlands1986 Luxemburg
Spain1990 Greece
United States1991 Canada1992 Japan1993 Denmark
GermanyItalySwedenHong KongUK
1994 AustraliaAustria
1995 United Arab Emirates1996 Norway
199G. Aldashev, T. Verdier / Journal of International Economics 79 (2009) 198–210
globalization good for beneficiaries and donors? This paper presentsan economic analysis of this phenomenon which, to our knowledge,has not been studied by economists so far.
As Smillie (1995) points out in his poignant account of the devel-opment NGO sector, most big NGOs started out as a response fromsome Western country's activists to a particular disaster in a devel-oping country. Initially such an NGO raised funds only in its country oforigin; however, soon it established affiliates in other developedcountries, becoming an international entity, similar to a multinationalfirm.
One well-known example is Oxfam. Oxfam UK was established inGreat Britain in 1943 to provide relief after the Greek famine of thesame year. In 1960, it opened its Canadian affiliate, Oxfam Canada.Shortly, two more foreign affiliates, Community Aid Abroad (theAustralian branch) and Oxfam New Zealand, were opened. Then fol-lowed the branches in continental Europe and Japan. The totalnumber of affiliates now has reached 13. The return on these invest-ments was impressive. For instance, the initial investment to open theCanadian branch cost 60000 pounds, and by 1970, this branch raisedand sent 1.2 mln pounds overseas (Black, 1992).
The NGO practitioners suggest that a key reason behind this inter-nationalization is domestic competition for donations. As Dichter (1999)points out, “New markets are aggressively tackled... NGOs have come upagainst donor saturation in their home countries... By going to [foreign]countries, the costs of recruiting new donors [are] lowered.”Moreover, asthe opening quote suggests, there might be increasing returns to scale inrunning fundraising campaigns internationally.
Fig. 1. The globalization timel
The competition for funds has its downsides, as it may lead to the“excessive fundraising” problem (Rose-Ackerman, 1982). She showsthat tougher competition between NGOs can be welfare-reducingbecause this induces NGOs to spend excessive portion of their budgetsfor fundraising activities. Moreover, the equilibrium number of NGOsis too big compared to the social optimum.
Thus, from an economist's point of view, the globalization of theNGO sector driven by competition for donations raises several im-portant questions. First, where does this globalization come from?Second, what is the effect of NGO globalization on the fundraising andproduction behavior of NGOs? Third, what are the welfare conse-quences of NGO globalization?
The answers to these questions can run counter to the standardeconomic intuition. Although models of international trade withmonopolistic competition suggest that welfare in a fully integratedmarket is higher than under autarky (Krugman, 1979), when it comesto non-profit organizations such as NGOs the result is less obvious.Gnaerig and MacCormack (1999) note that “the major national fund-raising markets have developed into international bazaars where onecan find competitors from a range of countries offering everythingfund-raisers all over the world could think of. This looks like thebeginning of a very tough selection process — at the end of which
ine of some major NGOs.
200 G. Aldashev, T. Verdier / Journal of International Economics 79 (2009) 198–210
there will probably be left only a handful of highly professional, globalNGOs...” This reduction in the number of NGOs and restructuring ofthe sector can imply a certain loss of welfare, in particular that ofdonors, who may find that globalization reduces the number of NGOvarieties present on the market.
The market for development donations with NGOs has the fol-lowing key characteristics:
• NGOs are differentiated. NGOs are mission-driven organizations andtheir missions differ substantially among themselves. Werker andAhmed (2008), for example, give the following typology of the U.S.international-development NGOs, based on the NGOs' missions:general development and assistance (21% of the total 4125organizations); agriculture (2%); economic development (5%);international relief (29%); education (12%); health (18%); scienceand technology (1%); democracy and civil society (2%); environ-ment, population, and sustainability (5%); human rights, migration,and refugee issues (5%). There is also evidence of differentiation ofNGOs operating in the same country, in terms of their missions andactivities: Fruttero and Gauri (2005) and Barr et al. (2005) find,based on data from Bangladeshi and Ugandan NGOs, respectively,that the activities of these NGOs cover dimensions as diverse asraising awareness, education and training, credit, health care, waterand sanitation, and employment facilitation.
• Donors give in reaction to fundraising campaigns. The importance offundraising is very well-known in the NGO industry. Smillie (1995,Chapter 7) argues that given the importance of fundraising as thesource of revenue, at its extreme form the appeals become ‘thepornography of poverty’, i.e. shocking images of starving childrenthat far outweigh the reality. According to Andreoni and Payne(2003), there exists the Iron Law of Fundraising: “[Donors] seem tohave latent demands to donate. Until they are asked, this demandgoes unexpressed... Individuals who may have ‘always wanted todonate’ but ‘didn't know the address’ will be able to donate whensolicited by the charity.” The authors also provide empiricalevidence for this mechanism: based on U.S. data, they find thatwhen a charitable organization receives a government grant, itstrategically reduces its fundraising activities which leads to apartial crowding-out of the grant (i.e. the total funds of the charityincrease by the amount less than the entire grant).
• NGOs compete with each other for donations. The competition fordonors is a long-standing and well-known problem for NGOs. Forexample, Hancock (1989) discusses the case of an American NGO,World Vision, aggressively competing for donors in the Australianmarket with local religious organizations: “On 21 December 1984,unable to resist the allure of Ethiopian famine pictures,World Visionran an Australia-wide Christmas Special television show calling onthe public in that country to give it funds. In so doing it broke anexplicit understanding with the Australian Council of Churches thatit would not run such television spectaculars in competition withthe ACC's traditional Christmas Bowl appeal. Such ruthless treat-ment of ‘rivals’ pays however. The American charity is, today, thelargest voluntary agency in Australia” (Hancock, 1989: 21).
In this paper, we build a simple economicmodel, based on these keycharacteristics of the donations market, that addresses the questionsposed above. We consider donors and NGOs in two (developed)countries. NGOs have to raise funds to invest into development projectsin the less developed part of the world. The crucial modelling choiceregards the structure of the NGO industry. Given the evidence on NGOdifferentiation, we naturally choose the location model of horizontallydifferentiated firms (Salop, 1979). Given that donors react to fundrais-ing, we use the framework of donor motivation of Andreoni and Payne(2003), i.e. the “power to ask”model. Finally, given that NGOs competewith each other for donors, we assume that the main strategic variableof NGOs is informative fundraising and thus we borrow from theadvertising model of Grossman and Shapiro (1984).
We characterize the free-entry equilibria under autarky andmarket integration via multinational NGOs. More precisely, we defineas autarky the regime in which national NGOs in either country canraise funds only in their countries of origin. The regime of multi-national NGOs depicts the situation in which there exist internationalnetworks of NGOs which are attached to one specific mission(project). The network can raise funds in either country, but it hasto establish local affiliates (i.e., incur the additional fixed cost and hirea local NGO entrepreneur). In such a regime, each international NGOnetwork (composed of these local affiliates) invests all the fundscollected into one project and exploits the potential economies ofscale in fundraising.
We find that the existence of national and multinational NGOsdepends on two characteristics of the home and foreign markets: therelative sizes of two markets (in terms of the number of donors) andthe returns to scale in fundraising. As multinational NGOs exert higherfundraising effort and therefore the competition between NGOsbecomes more intense, the multinational NGOs cannot coexist in thelong run with the national NGOs in both markets. If the returns toscale in fundraising are sufficiently large, the national NGOs in thesmaller market disappear under the pressure of the higher compe-tition. The national NGOs in the larger market can coexist with multi-national NGOs, but only if the larger market is large enough (so thatthe more intense competition does not become too intense in thelargermarket). On the other hand, if the returns to scale in fundraisingtechnology are not sufficiently strong, there are no multinationals inequilibrium, as no national NGO has an incentive to become multi-national. We thus explain the birth of multinational NGOs by thechanges in the returns to scale in the fundraising technology.
We then compare the social welfare under the two regimes. Wefind that although there are fewer NGOs in the regime with multi-nationals (as compared to autarky), each NGO exerts higherfundraising effort and this intensive-margin effect dominates theextensive-margin effect of exit. In other words, the total fundraisingeffort increases, thus improving the matching between donors andtheir preferred NGO varieties. Therefore, social welfare is higher in theregime with multinationals, as compared to autarky.
The rest of the paper is organized as follows. Section 2 builds thesimple model of the donations market for a single country. Section 3presents the two-country model, derives the equilibria with andwithout multinational NGOs, and evaluates the welfare under dif-ferent regimes. Section 4 links the facts concerning the internation-alization of the donations market to the theoretical model. Section 5concludes.
2. Basic model
2.1. Setup
Consider a country populated by a community of atomistic donors.The mass of donors in the community is L. Each donor has one unit ofresource that can be converted into private consumption with utilitynormalized to zero.
In the country, there is a given number of NGOs, i=1,…,N. EachNGO can run only one project (distinct from any other project). Thiscaptures the idea that NGOs are founded around missions: a field ofdevelopment into which the founder of the NGO wants to invest herefforts.
NGOs produce their services (i.e. actions directed towards theirmissions) using a simple linear technology: 1 unit of resource put intothe project of the NGO creates 1 unit of output (in terms of service).The NGO finances its projects from the funds collected throughfundraising activities. Here, we adapt the advertising model ofGrossman and Shapiro (1984) and assume that the fundraisingactivity has the following technology. Donors are located on the circleof perimeter 1. Thus, the density at each point on the circle is L. The
201G. Aldashev, T. Verdier / Journal of International Economics 79 (2009) 198–210
distance on the circle is defined in the following sense: each donor hasher perception of which dimension of development is the most im-portant one (e.g., promoting women's rights, banning child labor,providing education, fighting infectious diseases, etc.), and the lessthe project of an NGO corresponds to this perception, the “further” theNGO is located on the circle. The NGOs send solicitation messagestrying to convince donors to donate to their projects. Let NGO i decideto reach ϕi fraction of the circle of donors with the solicitationmessages. The financial cost of this solicitation (which will have to becovered using a part of the funds eventually collected) is A(ϕi), withthe following properties:
A 0ð Þ = 0; AV 0ð Þ = 0; AV /ð Þ N 0; AW /ð Þ N 0; AV 1ð Þ = ∞: ð1Þ
We assume that NGOs have a non-profit status. Thus, they face theso-called non-distribution constraint in that they cannot distributeprofits and have to invest all the residual funds into their projects(Weisbrod, 1988):
Di = cDi + A /ið Þ + Qi; ð2Þ
where Di is the quantity of funds that the NGO collects, c is the cost ofadministering a unit of donations, and Qi are the funds that it investsinto its project.
NGOs maximize the impact of their respective projects (or thequantity of services they produce towards their missions). From thenon-distribution constraint, we get:
Qi = Di 1− cð Þ− A /ið Þ: ð3Þ
We assume that all donors enjoy the utility from participating indevelopment (in the warm-glow sense of Andreoni (1989)). Thus, adonor giving to an NGO located from her at distance x∈ [0,1] on the‘circle’, enjoys utility
U = u − tx; ð4Þ
where ū is the participatory utility of giving and t is the unit‘transport’ cost, which measures the degree of conservativeness ofdonors with respect to their preferred dimensions of development.
As in Salop (1979) and Grossman and Shapiro (1984), we will belooking for the symmetric Nash equilibrium, assuming that NGO‘brands’ are equally spaced on the circle. Suppose there are N NGOs onthe circle. Then, the circle will be divided into N segments. We assumethat NGOs do not know the location of individual donors on the circleand thus cannot target their solicitation messages. Let an NGO i try toreach a fractionϕi of the circle, while each other NGO is trying to reach afractionϕ
_. Since NGOs cannot target theirmessages, the probability that
any donor located in the segment of the circle closest toNGO i is reachedis /i
N . Then, in this segment, the donations that NGO i collects are equal to
D1i = L/i
N:
In any of the next two neighboring segments, with probability 1−ϕ̄a donor does not receive themessage of her closest-located NGO, whilewith probability /i
N she is contacted by the NGO i (and therefore donatesto i). Then, the donations that the NGO i collects in any of those twosegments are
D2i = L/i 1− /� �N
:
Continuing in this manner, we get the general formula:
Dki = L/i 1−/� �k−1
N; k = 1; :::;
N2: ð5Þ
This allows us to compute the total donations that NGO i collectson the entire circle:
Di = L1N/i
/1− 1−/
� �N =2h i
gLN/i
/; ð6Þ
where the second equality is the approximation for a large N. If N islarge enough, this expression is also the ‘covered market’ condition,i.e. that any donor has received at least one solicitation.
2.2. Equilibrium
The problem of NGO i is to maximize the services it provides, bychoosing its fundraising effort ϕi:
max/i
LN/i
/1− cð Þ− A /ið Þ: ð7Þ
The first-order condition of this problem is
LN
1− cð Þ/
= AV/ið Þ: ð8Þ
The left-hand side of Eq. (8) is themarginal benefit of trying to reachmore donors: higher fundraising effort brings in more donations,because it increases both the probability that the closest-located donorsget a solicitation by i and the probability that the further-located donors‘untouched’ by their preferred NGOs get a solicitation by i. The right-hand side is the marginal cost: fundraising eats up resources that couldotherwise be devoted to the project. The NGO chooses the fundraisingeffort that equates marginal benefit with marginal cost.
In the symmetric Nash equilibrium, all NGOs choose the same levelof fundraising effort, whichwe denotewithϕn. The first-order condition(8) then becomes
LN
1− cð Þ = /nAV/nð Þ: ð9Þ
It is easy to see that a largermarket size (higher L), fewer competitors(lower N), and a lower administration cost (lower c) lead to a higherfundraising effort by NGOs. Note also that, since ϕi=ϕ̄=ϕn,ϕnA'(ϕn)now stands for thenet donations that anyNGOcollects in the symmetricNash equilibrium.
Next, let us pin down the long-runnumber ofNGOson themarket byimposing a free-entry condition. We assume that NGOs are founded byNGOentrepreneurs,whose alternative option is towork in the for-profitprivate sector. The relevant free-entry condition requires that theequilibrium payoff to an NGO entrepreneur equals her wage in the for-profit sector. Let the latter be F, and let her get an altruistic payoff fromworking towards themission of herNGO. For simplicity,we assume thatthis payoff is linear in the services produced by the NGO.
Then, the equilibrium number of NGOs satisfies
LN
1− cð Þ− A /nð Þ = F: ð10Þ
Using the first-order condition (9), we get
/nAV/nð Þ− A /nð Þuψ /nð Þ = F: ð11Þ
Note that at the equilibrium, the output of an NGO, ψ(ϕ), isincreasing in ϕ:
ψV/ð Þ = AV+ /AW − AV= /AW N 0:
In other words, inducing a small upward deviation from theequilibrium fundraising effort would increase the individual output ofall NGOs.
202 G. Aldashev, T. Verdier / Journal of International Economics 79 (2009) 198–210
Note also that using the properties of the fundraising technology(Eq. (1)), we have
ψ 0ð Þ = 0; ψ 1ð Þ = ∞:
Then, from Eq. (11), we find that the symmetric free-entry Nashequilibrium fundraising effort is an increasing function of the fixedcost of entry:
/n =~/ðF
þÞ: ð12Þ
The intuition is as follows: higher cost of entry means higheroutside option for an NGO entrepreneur. Thus, to induce her to enterthe NGO sector, her payoff from entering, i.e. the individual output inthe NGO sector, has to be higher. This can only be achieved bymarginally increasing the fundraising effort.
In other words, suppose the outside option of NGO entrepreneursincreases. At the current level of fundraising the payoff that anentrepreneur gets in the NGO sector becomes temporarily lower thanthe outside option. This induces some entrepreneurs to quit the NGOsector. In turn, this implies that the marginal benefit of fundraisingincreases and therefore remaining NGOs increase their fundraisingeffort.
This theoretical result is in line with the empirical finding byThornton (2006), who shows that non-profits spend more forfundraising in more concentrated markets (i.e. the ones with thehigher cost of entry).
The free-entry condition (10), together with Eq. (12), pins downthe equilibrium number of NGOs on the market, which we denotewith Nn:
Nn =L 1− cð Þ
~/ Fð ÞAVð~/ Fð ÞÞ
:
Given that both A′(·) and ϕ̃(·) are increasing functions, we cannow state
Proposition 1. The free-entry equilibrium number of NGOs increases inthe market size and decreases with the fixed and administrative costs:
NnðLþ;Pc;
PFÞ:
As we have explained, a higher fixed cost of entry induces exit ofsome NGO entrepreneurs. Similarly, a larger mass of donors (bigger L)or a lower cost of administering donations (smaller c) implies highernet donations and thus a higher marginal benefit of fundraising. Then,NGOs put more fundraising effort, which increases the output of eachindividual NGO. In turn, this would increase the relative attractivenessof the NGO sector and induce higher entry.
The free-entry equilibrium output of each NGO is then:
Qn =L 1− cð Þ
Nn− A /nð Þ = F: ð13Þ
2.3. Welfare
We can now compare the social welfare in the long-run equi-librium with the social optimum. Given that we try to evaluate howmuch welfare is generated by this market, the social welfare functionis the sum of the welfare of donors and of beneficiaries minus the totaloutside option of NGO entrepreneurs. The welfare of donors equalsthe total participatory utility minus the total ‘transport’ (misalign-ment of preferences) cost. For beneficiaries, we assume for simplicitythat their utility (as a group) is linear in the total impact of NGOprojects.
Let's first calculate the total ‘transport’ cost for donors (we areomitting the subscripts from the equilibrium values — for readingease). Denote with z ̄k the average ‘transport’ cost related tomatching with the k-th closest NGO. The donors matched to theirclosest NGO have the transport cost that varies from 0 to t
2N; then, forthese donors, z1 = t
4N. Similarly, for those that are matched to their2nd-closest NGO, z2 = 3t
4N. Grossman and Shapiro (1984) show that,in general,
zk = t2k − 14N
; k = 1;2; :::;N;
and that the average ‘transport’ cost (calculated over all donors) isthen
T /ð Þ =XN =2
k=1
/kzk = t2− /4N/
:
The social welfare can then be written as
W = uL − 2− /4N/
tL + QN − FN:
Using Eq. (13), the social welfare in the long-run equilibriumbecomes
W = L u + 1− c½ �− NA /ð Þ− NF − 2− /4N/
tL:
Suppose that the social planner has no control over the number ofNGOs on the market, but can impose restrictions on the amount offundraising done by the existing NGOs. We thus have to compare theequilibrium fundraising effort with the socially optimal one for a givennumber of NGOs.
Maximizing the social welfare with respect to the fundraisingeffort, we get
AWA/
= − NAV/ð Þ + 2/2
tL4N
= 0; ð14Þ
which can be rewritten as
/AV/ð Þ = tL2N2/
: ð15Þ
Remember that the Nash equilibrium fundraising is given byEq. (9). Comparing it to Eq. (15), we get the following
Proposition 2. For a given number of NGOs on themarket, the equilibriumfundraising is above the optimal amount if
L 1− cð ÞN tL2/N
: ð16Þ
The intuition for this result is the following. Higher fundraisingeffort exerted by NGOs has two effects on social welfare. On the onehand, it reduces the ‘transport’ cost for donors (i.e. improves thematching between donors and their preferred NGOs). On the otherhand, it imposes a stronger negative externality, as higher fundraisingby one NGO attracts donors away from other NGOs (the “business-stealing” effect). The condition (16) states that, given the number ofNGOs on the market, there is too much fundraising in equilibrium(with respect to the social optimum) if the “business-stealing” effect(given by the left-hand side) is bigger than the social gain from thelower ‘transport’ cost (described by the right-hand side).
Now suppose that the social planner can control both the numberof NGOs on the market and their fundraising effort. Maximizing the
203G. Aldashev, T. Verdier / Journal of International Economics 79 (2009) 198–210
social welfare with respect to the number of NGOs and the fundraisingeffort, we get
AWAN
= − A /ð Þ− F +2− /
4N2/tL = 0; ð17Þ
AWA/
= − NAV/ð Þ + 2/2
tL4N
= 0: ð18Þ
We can rewrite this system as
A /ð Þ = 2− /
4N2/tL − F;
AV/ð Þ = tL2/2N2 ;
which jointly give
/AV/ð Þ− A /ð Þ− F =/2AV/ð Þ
2: ð19Þ
Expression (19) implicitly pins down the socially optimalfundraising, ϕW.
Note that the left-hand side of Eq. (19) equals zero in the free-entry equilibrium (see Eq. (11)), while the right-hand side is strictlypositive. Therefore, we get
Proposition 3. The free-entry equilibrium fundraising is less thanoptimal:
/nb/W:
The intuition becomes clear if we look at the expression (19). Onthe left-hand side, ϕA′(ϕ)−A(ϕ) stands for an individual NGO'soutput, which is also the private return of the NGO entrepreneur. Inequilibrium, she chooses the fundraising effort ϕ such that under free-entry, this private return is just equal to her outside option. As wehave discussed above, fundraising plays two roles for social welfare. Ithas a positive social externality: higher fundraising by an NGO in-creases the probability that donors within the NGO's ‘segment’ of themarket will be contacted by this NGO and thus reduces the probabilitythat they will give to an NGO located further away from them(remember that the market is covered, thus all donors are contactedby at least one NGO; however, not all donors are contacted by theirnearest NGO). But it also has a negative externality (the “business-stealing” effect), which reduces the output of all other NGOs and thus,under free-entry, creates excessive exit. Suppose that the equilibriumnumber of NGOs is equal to one that the social planner would havepicked. Then Proposition 3 says that, in equilibrium, NGOs would failto internalize only the positive externality, which means that they tryto reach too few donors.
This intuition also helps to reconcile Propositions 2 and 3. In fact,Proposition 2 says that for a given number of NGOs on the market, theequilibrium fundraising would be too low if the positive externality isinternalized less than the negative “business-stealing” externality.Proposition 3 says that if the “business-stealing” externality is correctlyinternalized by the social planner, the equilibrium fundraisingwould betoo low, since only the positive externality remains.
3. Multinational NGOs
3.1. Setup
Now suppose that there are two countries, domestic and foreign,with the mass of donors L and L⁎, respectively. NGOs now can become‘multinationals’. We assume that a multinational NGO is characterized
by two essential features. First, multinational NGOs by definition taptheir resources internationally, conducting fundraising in severalcountries at the same time. Second, their reputation and public imageis highly attached to a specific dimension of development in whichthey tend to consolidate all their actions. Indeed, most internationalNGOs concentrate, by their statute (at least officially), their projectsand actions in one particular domain. In other words, a multinationalNGO is an international mission-driven organization. We have pre-sented some examples in Table 1. This attachment to a particularmission, together with the internationalization of activities, allowsmultinational NGOs to exploit the gains from specialization andeconomies of scale in terms of fundraising campaigns. Moreover, themultinational status often gives an additional advantage to pursue theNGO's mission during negotiations with governments and supra-national organizations. For instance, UN's ECOSOC (Economic andSocial Council) explicitly favors multinational NGOs by giving themmore opportunities to attend ECOSOCmeetings and to submit writtenadvice (Simmons, 1998).
In our simple framework with two countries, we capture thesefeatures in the following way. First, we assume that multinationalNGOs can raise funds in both markets; however, they need to es-tablish local affiliates. In other words, an NGO that wants to enter theforeign market has to incur an additional fixed cost, fbF. Second, allthe funds are invested in one development project which correspondsto the specific mission of the NGO.
This, however, implies that the fundraising levels of the nationalandmultinational NGOswould not, in general, be equal. Therefore, wecannot employ the usual procedure to solve for a symmetric Nashequilibrium. Instead, we adopt the solution technique proposed byAghion and Schankerman (2004) and assume that an NGO does notknow, when deciding its fundraising effort, which NGOs on the circleare national NGOs or multinationals. It only knows which fraction ofNGOs is multinational and operating in its market.
Formally, let's denote with ϕi and ϕm the fundraising levels ofnational and multinational NGOs, respectively, and let p be the frac-tion of national NGOs. Then we get the following result:
Lemma 4. If N is large enough, the donations that an NGO collects areapproximately
Dig/i
/ ̂LN; ð20Þ
where ϕ̂ is the average fundraising effort:
/̂ = p/i + 1− pð Þ/m:
Proof. See Appendix. □Compare Eq. (20) to Eq. (6): two expressions are very similar. This
technique thus allows us to break the usual symmetry of the Salop(1979) model without getting into the complication of conditioningan NGO's strategy on the type of its neighbors.
3.2. Equilibrium
The problem of a generic NGO i is now
max/i
/i
/ ̂LN
1− cð Þ− A /ið Þ:
Note that now the number of segments on the donation circles willnot, in general, be equal to the number of NGOs, given that some ofthem may become multinationals. Let's denote with N and N⁎ thenumber of segments respectively on the home and foreign markets,
204 G. Aldashev, T. Verdier / Journal of International Economics 79 (2009) 198–210
with n and n⁎ the number of national NGOs in home and foreigncountries, and with m the number of multinational NGOs.
Then, a national NGO in the home country solves the followingproblem:
max/i
/i
/ ̂N
LN
1− cð Þ− A /ið Þ;
while the problem of a national NGO in the foreign country is
max/⁎i
/⁎i
/ ̂⁎N ⁎
LN⁎
1− cð Þ− A /⁎i
� �:
The problem of a multinational NGO is to choose the fundraisingeffort ϕm to maximize its output, taking into account that it has to payan additional cost of establishing the foreign affiliate, f:
max/m
/mL
N/̂+
L⁎
N⁎/̂⁎
" #1− cð Þ− A /mð Þ− f :
Note that each of the three groups — national NGOs in the homecountry, national NGOs in the foreign country, and multinationalNGOs — is symmetric within, i.e. all organizations within a group putthe same fundraising effort. Then, the number of competing NGOs inthe home and foreign markets has to satisfy the following equalities:
N/ ̂ = n/i + m/m; ð21Þ
N⁎/ ̂⁎ = n⁎/⁎i + m/m: ð22Þ
For further notational convenience, let's denote the marginalbenefit of fundraising in home and foreign countries as:
B =L 1− cð ÞN/̂
and B⁎ =L⁎ 1− cð ÞN⁎/ ̂⁎
: ð23Þ
We start by looking for an equilibrium in which home and foreignnational NGOs coexist with multinationals, i.e. in which nN0,n⁎N0,and mN0.
We can prove the following
Proposition 5. National NGOs in home and foreign countries cannotcoexist with multinational NGOs in a free-entry equilibrium.
Proof. See Appendix. □The economic intuition is as follows. For a multinational NGO,
given that the same fundraising effort reaches donors in both coun-tries, the marginal benefit of fundraising is B+B⁎. Given that the costof fundraising is increasing, this implies that a multinational NGO putshigher fundraising effort than a national NGO. The free-entryequilibrium output of amultinational NGO (that comes from investingfunds collected in both countries into her project) has to be equal tothe total fixed cost of founding the headquarter NGO and the affiliatein the other country, i.e. f+F. Thus, the advantage of being a multi-national is to be able to collect funds in both countries using the samefundraising activity; however, this comes at the cost of having toestablish the affiliate. Given the scale advantage in fundraising thatthe multinational NGO enjoys compared to its national counterpart,whenever it is beneficial for a new NGO entrepreneur to enter as anational NGO in one of the markets, there is an even stronger in-centive for an existing national NGO to become multinational. In thelong run, this implies that at least in one of the countries, all nationalNGOs will become multinationals. In other words, in the long-run
equilibrium, at least in one of the countries, the national NGOs willdisappear.
Does this imply that in the long run, all national NGOs becomemultinationals? To answer this question, let's assume, without loss ofgenerality, that LNL⁎, and start looking for the equilibrium in whichnational NGOs coexist with multinationals only in the larger market,i.e. nN0,n⁎=0, mN0.
It is useful to separate the analysis into two cases.
3.2.1. Case 1: large economies of scaleSuppose that economies of scale from becoming a multinational
NGO are relatively large, i.e. the marginal cost of fundraising for amultinational is smaller than twice the marginal cost for a nationalNGO:
AVð~/ Fð ÞÞN 12AVð~/ f + Fð ÞÞ
Moreover, suppose that the sizes of the two countries aresufficiently different. Then we can show the following result.
Proposition 6. If the economies of scale are sufficiently large and thesizes of the two countries are sufficiently different, i.e.
LL⁎
NAVð~/ Fð ÞÞ
AVð~/ f + Fð ÞÞ− AVð~/ Fð ÞÞ N 1; ð24Þ
then in equilibrium the national NGOs in the larger country coexist withmultinational NGOs and there are no national NGOs in the smallercountry:
n N 0; n⁎ = 0; m N 0:
Proof. See Appendix. □The economic intuition for this result is as follows. Since for a
multinational NGO the marginal benefit of fundraising is higher thanfor a national NGO (because it collects funds in both marketscontemporaneously), the multinational chooses higher fundraisingeffort than a national NGO. Note that the marginal benefit also equalsthe average benefit of fundraising, which, in turn, determines theequilibrium payoff of the NGO. If, at the equilibrium, the averagereturn on fundraising from becoming a multinational (for an alreadyexisting national NGO) is higher than that for a new national entrant(in other words, if the returns to scale in fundraising are sufficientlyhigh), the multinational firms exist in equilibrium.
On the other hand, suppose that the home country is sufficientlylarge as compared to the foreign. Then, in equilibrium, given that apart of national NGOs in the home country have become multi-nationals and thus have increased their fundraising effort, the com-petition on both markets becomes tougher. This tougher competitiondrives out all national NGOs in the smaller (foreign) market.Contrarily, in the home market, if it is sufficiently big, even underthe tougher competition there is enough space for the national NGOs.
Suppose now that the sizes of the two markets are not toodifferent, i.e.
1bLL⁎
bAVð~/ Fð ÞÞ
AVð~/ f + Fð ÞÞ− AV ~/ Fð Þ� � :
Then we can show the following result:
Proposition 7. If the economies of scale are sufficiently large and thesizes of the two countries are not too different, i.e.
1bLL⁎
bAVð~/ Fð ÞÞ
AVð~/ f + Fð ÞÞ− AVð~/ Fð ÞÞ ;
Fig. 3. Country sizes and equilibria under small economies of scale.
205G. Aldashev, T. Verdier / Journal of International Economics 79 (2009) 198–210
then in equilibrium there are only multinational NGOs:
n = n⁎ = 0; m N 0:
Proof. See Appendix. □The intuition is simple: if home country is not sufficiently large as
compared to the foreign, stiffer competition in the home marketcaused by the globalization of NGOs drives out national NGOs even inthe larger market. Then, only the multinationals can exist in the long-run equilibrium, and two countries essentially become one singledonation market.
Fig. 2 summarizes the above results.
3.2.2. Case 2: small economies of scaleConsider now the case with relatively small economies of scale in
fundraising. The following result is true:
Proposition 8. If the economies of scale from becoming a multinationalare relatively small, i.e.
AVð~/ Fð ÞÞb12AVð~/ f + Fð ÞÞ;
then there are no equilibria with multinational NGOs.
Proof. See Appendix. □The intuition is straightforward. If the economies of scale in
fundraising are relatively small, there is no incentive for a new multi-national to enter, because the payoff it would get in equilibrium islower than its outside option (Note that the free-entry condition fornational NGOs imply that we do not need to check that a nationalNGO does not have an incentive to become multinational). Contrarily,if the economies of scale were relatively high, the payoff for a newmultinational entrant would be bigger than its outside option andthus in equilibrium some multinational NGOs would appear.
Fig. 3 summarizes the findings for the case of small economies ofscale.
3.3. Welfare
We can now compare the socialwelfare under the different regimes.We first need to calculate the total expected ‘transport’ cost of
donors. The following result holds:
Fig. 2. Country sizes and equilibria under large economies of scale.
Lemma 9. Donors' total expected ‘transport’ cost is approximately equal to
T /̂� �
g2− / ̂4N/̂
tL:
Proof. See Appendix. □Thus, the generic social welfare function can be written as:
W = u L + L 1− cð Þ− NE A /ð Þð Þ− NF − 2− / ̂4N/ ̂
tL =
= uL + L 1− cð Þ− N pA /Lð Þ + 1− pð ÞA /Hð Þ½ �− NF − 2− /̂4N/ ̂
tL:
Let's start with the welfare in the free-entry equilibrium underautarky. For home and foreign country, it is:
W jA = uL −2−~/ Fð Þ
4n~/ Fð Þ tL + Qn−Fn|fflfflfflfflffl{zfflfflfflfflffl}
=0 in equilibrium
= uL −2−~
/ Fð Þh i
AVð~/ Fð ÞÞ4 1− cð Þ t;
ð25Þ
W⁎ jA = uL⁎ −2−~
/ Fð Þh i
AVð~/ Fð ÞÞ4 1− cð Þ t + Qn⁎−Fn⁎|fflfflfflfflfflfflffl{zfflfflfflfflfflfflffl}
=0 in equilibrium
: ð26Þ
Howdoes the ‘transport’ cost of donors evolvewithhigher fundraisingeffort of NGOs? From Eq. (25), one can see than the ‘transport’ cost isincreasing/decreasing in ϕ̃ if
ϖð~ϕÞu 2− ~ϕ Fð Þ
h iA′ð~ϕ Fð ÞÞ
is increasing/decreasing in ϕ̃.Let's now turn to the regime with only multinational NGOs (i.e.,
n=n⁎=0 and mN0). We can then consider the two markets as justone larger integrated market, with L+L⁎ donors. The equilibriumwelfare on this market is:
W jm + W⁎ jm = u L + L⁎� �
−2− ~/ f + Fð Þ
4m~/ f + Fð Þ t L + L⁎
� �
= u L + L⁎� �
−2−~
/ f + Fð Þh i
AVð~/ f + Fð ÞÞ4 1− cð Þ t
ð27Þ
206 G. Aldashev, T. Verdier / Journal of International Economics 79 (2009) 198–210
Compare Eq. (27) to Eqs. (25)–(26). The total welfare underautarky is
W jA + W⁎ jA = u L + L⁎� �
−2AVð~/ Fð ÞÞ 2− ~
/ Fð Þh i
4 1− cð Þ t:
Note that since the equilibrium fundraising effort put by multi-national NGOs is higher than the one put by national NGOs, ϕ̃( f+F)Nϕ̃(F), and therefore [2− ϕ̃(F)]N [2−ϕ̃( f+F)]. Moreover, given that inthe regimewith onlymultinational NGOs the returns to scale are largeenough, we know that 2A′(ϕ̃(F))NA(ϕ̃(f+ F)). Then, the total‘transport’ cost is smaller in the regime with only multinationalNGOs than under autarky. In other words,
W jm + W⁎ jm N W jA + W⁎ jA:
Proposition 10. The total welfare in the multinational-only integratedequilibrium is higher than the total welfare under autarky.
The economic intuition is as follows. Given that the marginalbenefit of fundraising is higher for multinationals than for nationalNGOs, in equilibrium the multinationals put more effort than thenational NGOs. On the other hand, the tougher competition in thepresence of multinationals drives out some NGOs. Thus, there are twomutually opposed effects on donors' ‘transport’ cost: higher fundrais-ing effort reduces the ‘transport’ cost, while fewer NGOs imply higher‘transport’ costs. However, the first — intensive-margin — effectalways dominates the second — extensive-margin — effect. Then, ifthere are only multinational NGOs, the resulting total ‘transport’ costfor donors is lower in the integrated equilibrium than under autarky.In other words, as higher total fundraising effort implies lower prob-ability of mismatch for donors (i.e. that they give to an NGO differentfrom the closest-located one), the increase in welfare comes from thebetter matching of donors to their preferred projects.
What about the regime in with multinationals coexist with nationalNGOs? Consider the home country (inwhich nN0). Thewelfare level onthis market is
W jmn = u L + nL 1− cð ÞN/ ̂
/i − A /ið Þ− F� �
+
+ mL 1− cð ÞN/̂
+L⁎ 1− cð Þ
m/m
!/m − A /mð Þ− f − F
" #− 2− /̂
4N/̂tL;
where ϕ̂ is the average fundraising effort (given that the homemarkethas both national and multinational NGOs):
/̂ = p/i + 1− pð Þ/m:
Then, using the free-entry conditions, we get
W jmn = uL −2− /̂4N/̂
tL = uL −2− /̂h i
AVð~/ Fð ÞÞ4 1− cð Þ t;
while for the foreign market, we have
W⁎ jmn = uL⁎ − 2− /m
4m/mtL⁎ = uL⁎ −
2− ~/ f + Fð Þ
h iAVð~/ f + Fð ÞÞ− AVð~/ Fð ÞÞh i4 1− cð Þ t:
Note that since ϕ̂∈ [ϕ̃(F),ϕ̃( f+F)], we have
2− /̂
AV ~/ Fð Þ� �
b 2− ~/ Fð Þ
h iAVð~/ Fð ÞÞ:
Therefore, the welfare level in the larger country is higher in the‘mixed’ regime than under autarky:
W jmn N W jA:
Similarly, for the smaller country, we have
2−~/ f + Fð Þ
AV ~/ f + Fð Þ� �
− AV ~/ Fð Þ� �h i
b 2−~/ Fð Þ
h iAV ~
/ Fð Þ� �
:
Therefore, the welfare level in the smaller country is also higher inthe ’mixed’ regime than under autarky:
W⁎ jmn N W⁎ jA:
Thus, both countries gain under the mixed regime, as compared toautarky.
Proposition 11. The total welfare in the regime with both multinationalsand national NGOs is higher than the total welfare under autarky, for bothcountries.
Our results imply that the globalization of NGOs increases socialwelfare. The main factor behind this increase is the fact that despitethe tougher competition and the reduction in NGO variety, this varietyreduction is always small enough as to imply higher total fundraisingeffort and as to decrease the mismatch between donors and theirpreferred varieties. Thus, although NGO globalization reduces NGOvariety, globalization is still welfare-increasing.
Smillie (1995, Chapter 11) describes the likely future of the worlddonations market with multinational NGOs as follows:
“Will the transnationals crowd out other Northern NGOs? It isalready happening in the case of emergencies, and there can belittle doubt that they are eating into the ‘development’ income ofsmaller one-country NGOs. There is so much fundraising competi-tion, and so few ways to learn about which NGO is effective, thatindividuals considering a donation simply go with the householdnames: those seen every night on the news from the latest famine,cyclone, or war zone. In the end, neither the market nor the need canjustify or support the proliferation of tiny Northern NGOs, each tryingto be special, different, more effective, more efficient, more uniquethan the rest... New lookalike agencies appear every year. Some ofthe hardier ones will undoubtedly survive, either because theyadopt some of the techniques of the transnationals, or because theydevelop special expertise and carve out newniches in developmenteducation or fundraising. But some will surely vanish, ... victims ofthe increasingly sophisticated fundraising techniques of thetransnationals” (Smillie, 1995: 210–211).
4. Discussion
Thus, how can we explain the facts concerning the globalization ofNGOs described in the introduction? Our model suggests that thetrend of NGOs becoming multinational organizations is driven byeconomies of scale in fundraising technology. We must be assisting toamove from the equilibria described in Fig. 3 (when returns to scale infundraising were relatively low) to those depicted in Fig. 2 (withrelatively large returns to scale).
Where did this change in the scale economies come from? Lookingmore closely into the history of NGOs in the 1970s–1990s suggestsseveral potential answers.
One important phenomenon is emergencies. Smillie (1995) writes:“With the exception of Plan International, most transnationals devote asignificant part of their fundraising effort and their programme expen-diture to emergencies. In recent years, this has proved to be the mostimportant way for the very biggest fundraising NGOs, for example SCFUK and OxfamUK, tomaintain and expand theirmarket share” (Smillie,
207G. Aldashev, T. Verdier / Journal of International Economics 79 (2009) 198–210
1995: 200). Clearly, in the case of emergencies and humanitarian crises,when donors in all Northern countries are willing to give, the samesolicitationmessage can be relatively easily adapted for the donor publicin different countries. This is what the opening quote of this paper calls‘changing the face and the accent in front of the camera’. It is very likelythat the relatively low-cost high-return fundraising opportunitiestriggered by humanitarian crisesmust be a key factor behind increasingreturns to scale and the multinationalization of NGOs. In fact, mainglobal NGOs (for example, those listed in Table 1) all have an importantemergency component in theirmissions. Another remarkable fact is thatwhile the budgets of emergency-oriented organizations such as those inTable 1 are between600 and2100mlndollars, the biggestmultinationalNGOs in other domains (environment, human rights) aremuch smaller:94 mln dollars in the case of WWF and 39 mln dollars in the case ofAmnesty International (Werker and Ahmed, 2008).
However, this alone cannot explain the internationalization phe-nomenon. Emergencies, unfortunately, havebeenhappening also in otherdecades; however, we do not observe the surge in multinational NGOsbefore 1970s. Another important development in the NGO sector — themassive use of modern media technologies in fundraising appeals — canperhaps help to complete our explanation. For example, concerningOxfam, Smillie (1995) writes: “Oxfams in Canada, the United States andelsewhere have benefited repeatedly from the international mediapublicity earned by Oxfam UK workers in Bangladesh, Ethiopia andRwanda... This [publicity], economies of scale and access to increasinglysophisticated communications technology give such organizations con-siderable advantage over the loneGerman or FrenchNGOoperating on itsown, regardless of quality of the work” (Smillie, 1995: 202). Similarly, intheir account of the globalization of NGOs, Lindenberg and Bryant (2001)write: “One of the major innovations, and a part of the process of‘becoming global’ in the last several years, has been the establishment ofinternational network offices (for example, the International Save theChildren Alliance, Oxfam International, or CARE International) chargedwith increasing the collaboration among the national offices andproviding, in some cases, some services common to all... Much of thefocus of the international unit has been on helping individual membersincrease their local fundraising capacity — often by sponsoring majorfundraising events that the international office helps make happen, suchas the British Telecom-sponsored Around the World Sailing Race”(Lindenberg and Bryant, 2001: 52). Bernard Kouchner, the founder ofthe MSF, uses the words “Law of the Hype” (La loi du tapage), to describethe importance of media in case of emergencies. The more an NGO talksabout a certain emergency, themore individual donors are likely to give tothis cause: “an un-televised misery is an unknown misery” (Kouchner,1991). Thus, it is not just emergencies per se, but the joint effect ofemergencies and of the use ofmassmedia technologies byNGOs, that canbetter explain the origin of these higher economies of scale.
Finally, a third important driving factor has been changes in gov-ernment policies towards NGOs, in particular in Europe. For instance,concerning the use of matching grants, we read: “Most Northern gov-ernments provide matching grants based partially on an NGO's domesticfundraising. The terms and conditions of the matching formulae varygreatly, from less than 50% tomore than 90%. In Swedenwhere ratios aregenerous and competition is low, an American NGO, say, need only openan office in Stockholm, invest (perhaps heavily) in fundraising, and thenapply for a matching grant. This practice is becoming especiallyfashionable in Europe with the advent of the European Community andincreasingly blurred national borders” (Smillie, 1995: 202). A moregenerous matching grant increases the returns on the same fundraisingeffort, thus providing an additional incentive for existing national NGOs toenter into other donor markets.
The pattern of expansion of particular NGOs is also revealing. Forinstance, the first three foreign affiliates of MSF — a French NGO —
were in Belgium and Switzerland, while the UK-born Oxfam's firstaffiliate was in Canada. Similarly, Plan International, founded by theBritish war correspondent John Langdon-Davies, conducted its first
international fundraising campaigns jointly in the UK, the US, andAustralia. Quite naturally, the scale economies are highest for thecountries that share the same language: this basically meansaccessing a foreign donation market at a lower cost.
5. Conclusion
As Lindenberg and Bryant (2001) argue, “One important wayNGOs are changing to cope with the demands of a globalizing world isto become more global themselves” (Lindenberg and Bryant, 2001:15). This paper has analyzed this interesting market integrationphenomenon: the globalization of the donation market. We haveshown that the key factors behind this globalization are those thathave increased the economies of scale in the NGOs' fundraisingcampaigns. We have also found that despite the reduced variety ofNGOs, the globalization in the long run increases social welfare.
Clearly, there might be other reasons why multinational NGOs aremore productive than their national counterparts. There might beeconomies of scale not only in fundraising, but also in production. Or,multinational NGOs can better absorb falls in donations by cross-subsidizing their affiliates in case of a negative shock in one of theaffiliate countries. We leave the exploration of these interestingextensions for future work.
Another dimension which we have not explored in this paper is themisalignment of interest between affiliates in the same NGO ‘family’.Recent episodes (e.g. disagreements between MSF France and MSFBelgium) indicate that themissions of different affiliatesmight not alwaysbe perfectly aligned, which create tensions and probably affect both thecollection and spending of funds for different projects. One element thatplays an important role in these tensions is the degree of independence ofthe affiliates from the headquarter organization. Lindenberg and Bryant(2001, Chapter 5) discuss several associational structures: from unitary-corporate to federations to coalitions of independent affiliate bodies, andshow that different NGO ‘families’ stand at very different positions on thisspectrum.Why somemultinational NGOs (such asWorld Vision) prefer amore centralized structure, while others (such as Oxfam andMSF) opt fora more independent one? And, given that the misalignment of interestbetween affiliates probably reduces the productivity of a multinationalNGO, how should the welfare evaluation derived above be adjusted?These are extremely interesting questions that lie beyond the scope of thispaper, but are certainly worth exploring, theoretically and empirically.
The donation markets worldwide are going through profoundchanges and multinational NGOs are key actors of this change. Thispaper shows that we can fruitfully apply the tools from internationaltrade models to understand these phenomena.
Appendix A
Proof of Lemma 4. The procedure is similar to that in Section 2.1, butwe have to take into account that from the point of view of NGO i, anyrival NGO can be either national (with prob. p) or multinational (withprob. 1-p). The calculation for the segment in which NGO i is located isidentical to that in Section 2.1, because the types of the rivals do notmatter. For the next-neighboring segments, the expected probability thatthe rivals located in those segments do not contact a donor located thereis p(1−ϕi)+(1−p)(1−ϕm), and thus the expected donations collectedin those segments are equal to /i
N p 1− /ið Þ + 1− pð Þ 1− /mð Þ½ �.Proceeding in the similar manner, we get the total donations that NGOi collects:
Di =/i
N
XN =2
k=0
p 1−/ið Þ + 1−pð Þ 1−/mð Þ½ �k
=/i
N
XN =2
k=0
1−/̂ k =
/i
/̂1− 1−/ ̂
N =2� �
;
ð28Þ
208 G. Aldashev, T. Verdier / Journal of International Economics 79 (2009) 198–210
where ϕ̂ denotes the expected fundraising by an NGO whose type(national or multinational) is unknown:
/̂ = p/i + 1− pð Þ/m:
For N large enough, Eq. (28) is well-approximated by
Dig/i
/ ̂LN: □
Proof of Proposition 5. The first-order conditions for the problemsof the three types of NGOs equate themarginal benefits withmarginalcosts:
B = AV/ið Þ; B⁎ = AV /⁎i
� �; B + B⁎ = AV/mð Þ:
The free-entry condition for national NGOs is the same as in thebasic model:
/iAV/ið Þ− A /ið Þ = F: ð29Þ
Using the first-order condition, we get ϕi=A′−1(B). Then, we canwrite the equilibrium output as
BAV−1 Bð Þ− A AV−1 Bð Þ� �
= ψ Bð Þ:
Given this, the free-entry conditions imply that
ψ Bð Þ = F; ψ B⁎� �
= F; ψ B + B⁎� �
= f + F: ð30Þ
Note that the equilibrium output is increasing in B:
ψV Bð Þ = AV−1 Bð Þ + BAW AV−1 Bð Þ� � − B
AW AV−1 Bð Þ� � = AV−1 Bð Þ N 0:
Moreover, ψ(0)=0 and ψ(∞)=∞. Therefore, from Eq. (30) we getthat the marginal benefits of fundraising (and thus equilibriumfundraising efforts) are the same for national NGOs in two countries:B=B⁎ and ϕi=ϕi⁎.
For a multinational NGO, instead, using the relevant first-ordercondition and the fact that B=B⁎, the equilibrium fundraising effortbecomes:
/m = AV−1 2Bð Þ;
and the relevant free-entry condition is now:
ψ 2Bð Þ = f + F: ð31Þ
We can write the free-entry equilibrium fundraising efforts asfunctions of fixed costs, for national and multinational NGOs:
/i = /⁎i =~/ Fð Þ; /m =~
/ f + Fð Þ:
Then, from Eqs. (21), (22), and (23), we get
L 1− cð ÞAV ~
/ Fð Þ� � = n
~/ Fð Þ + m
~/ f + Fð Þ; L⁎ 1− cð Þ
AV ~/ Fð Þ� � = n⁎
~/ Fð Þ + m
~/ f + Fð Þ:
The number of national and multinational NGOs is fully describedby the parameters of the model (L,L⁎,c,f,F) and the functional formA(.).
Combining the two equations above, we find that the multina-tional NGOs in equilibrium would have to choose the fundraisingeffort such that its marginal cost is exactly double of the marginal costof fundraising for the national NGOs:
AVð~/ Fð ÞÞ = AVð~/ f + Fð ÞÞ2
:
Clearly, for an arbitrary f, this is a zero-measure case.Note, moreover, that the equilibrium impact is a convex function:
ψW Bð Þ = 1AW AV−1 Bð Þ� � N 0:
Let's denote the scale advantage of the multinational (in terms ofoutput) with h(λ)=ψ(λB)−λψ(B), for arbitrary λ. The scaleadvantage function h'(λ) is increasing in λ:
hV λð Þ = BψV λBð Þ− ψ Bð Þ:
Moreover,
hV 1ð Þ = BψV Bð Þ− ψ Bð Þ N 0:
Thus, h(λ) is increasing in λ≥1. Then, in equilibrium, themultinational NGO gets higher output than the two national NGOs:
ψ 2Bð Þ− 2ψ Bð Þ N 0 for all Bz0:
But then, from Eqs. (30) and (31), we obtain f−FN0, whichcontradicts our assumption fbF. Then, there cannot be an equilibriumsuch that nN0, n⁎N0, and mN0. □
Proof of Proposition 6. For the national NGOs in the home country,under the free-entry condition (29), we get the equilibrium fundrais-ing effort, as before:
B = AV/ið ÞZ/i =~/ Fð Þ;
while using the free-entry condition for multinational NGOs,
/mAV/mð Þ− A /mð Þ = f + F; ð32Þ
we find the equilibrium multinational fundraising effort:
B + B⁎ = AV/mð ÞZ/m =~/ f + Fð Þ:
Using the expressions formarginal benefits of fundraising (Eq. (23)),we also get
L 1− cð ÞAVð~/ Fð ÞÞ = n
~/ Fð Þ + m
~/ f + Fð Þ; ð33Þ
AVð~/ Fð ÞÞ + L⁎ 1− cð Þm
~/ f + Fð Þ = AVð~/ f + Fð ÞÞ: ð34Þ
Eqs. (33) and (34) pin down the free-entry equilibrium number ofmultinational and national NGOs:
m =L⁎ 1− cð Þ
AVð~/ f + Fð ÞÞ− AVð~/ Fð ÞÞ1
~/ f + Fð ÞN 0; ð35Þ
n =L 1− cð ÞAV ~
/ Fð Þ� � − L⁎ 1− cð ÞAV ~
/ f + Fð Þ� �− AV ~
/ Fð Þ� �" #
1~/ Fð Þ : ð36Þ
209G. Aldashev, T. Verdier / Journal of International Economics 79 (2009) 198–210
Note that the national NGOs exist in the long run in the homecountry (i.e. n≥0) if and only if
LL⁎
NAVð~/ Fð ÞÞ
AVð~/ f + Fð ÞÞ− AVð~/ Fð ÞÞ :
Analogously, suppose now L⁎NL. We can then immediatelycharacterize the equilibrium with n=0,n⁎N0,mN0. From Eq. (36), itis clear that this equilibrium is possible in the long run if and only if
L⁎
LN
AVð~/ Fð ÞÞAVð~/ f + Fð ÞÞ− AVð~/ Fð ÞÞ :
The national entrants in the foreign market would choose thefundraising effort ϕi
s so as to satisfy the relevant first-order condition:
B⁎ = AV /si
� �:
Given that
B + B⁎ = AVð~/ f + Fð ÞÞZB⁎ = AVð~/ f + Fð ÞÞ− AVð~/ Fð ÞÞ;
the marginal cost of fundraising for the foreign national NGO has tosatisfy
AV /si
� �= AVð~/ f + Fð ÞÞ− AVð~/ Fð ÞÞbAVð~/ Fð ÞÞ;
and therefore
/sib
~/ Fð Þ:
However, at this fundraising effort level, the output of the nationalNGO in the foreign country would fall below the outside option of anNGO entrepreneur. This confirms that foreign national NGOs have noincentives to enter in the long-run equilibrium. □
Proof of Proposition 7. Using the free-entry condition for multi-nationals (Eq. (32)) and given that themarginal benefits of fundraisingare written as
B =L 1− cð Þm/m
and B⁎ =L⁎ 1− cð Þ
m/m;
we get
L + L⁎� �
1− cð Þm/m
= /mAV/mð Þ:
Consider now a fully integrated market (i.e., one single market ofsize L+L⁎). The number of NGOs in this market should satisfy
m =~/ f + Fð ÞAVð~/ f + Fð ÞÞh i−1
L + L⁎� �
1− cð Þ:
This means that the marginal cost of fundraising effort atequilibrium is
AV /si
� �=
LL + L⁎
AVð~/ f + Fð ÞÞbAVð~/ Fð ÞÞ;
and therefore ϕisb ϕ̃(F), which implies that the payoffs for a national
NGO entrant are lower than the outside option, F; i.e., n=0. □
Proof of Proposition 8. Analogously to the analysis above, we caneasily show that ϕi
sN ϕ̃(F). In other words, the new national entrantswould get a sufficiently high payoff to justify their entry. Then, nN0
and n⁎N0. If there are no multinationals, the number of home andforeign national NGOs is equal to
n =L 1− cð Þ
~/ Fð ÞAVð~/ Fð ÞÞ and n⁎ =
L⁎ 1− cð Þ~/ Fð ÞAVð~/ Fð ÞÞ :
Let's show that there is no incentive for the entry of a newmultinational. The entering multinational would choose the fundrais-ing effort level ϕm
s such that its marginal cost, A′(ϕms ), equals the
marginal benefit, B+B⁎, which, in turn, equals A′(ϕ̃(F))+A′(ϕ̃(F)).Given that the returns to scale in fundraising are not sufficiently large,we have
AV /sm
� �= 2AVð~/ Fð ÞÞbAVð~/ f + Fð ÞÞ;
which implies ϕms b ϕ̃(f+ F), i.e. that the payoff from being a
multinational is lower than the outside option (f+F), and thusthere is no incentive for an entry of a new multinational. Note thatgiven the free-entry condition for a national NGO, we do not need tocheck that there is no incentive for an existing national NGO tobecome multinational. □
Proof of Lemma 9. The total expected ‘transport’ cost for donors isgiven by
LE /iz1 + /i 1− /i + 1� �
z2 + ::: + /i 1− /i + 1� �
::: 1− /i +
N2
!zN =2
" #+
+ LE /iz1 + /i 1− /i−1ð Þz2 + ::: + /i 1− /i−1ð Þ::: 1− /i−N
2
!zN =2
" #=
= L/̂z1 + LXN =2
k=1
zkXkj=0
Cjk 1−/Hð Þj 1−/Lð Þk− jpk− j 1−pð Þj
24
35=
= L/̂XN =2
k=1
1−/̂� �k−1zk;
where
zk = t2k − 14N
:
Then, it becomes
T / ̂� �
= tL/ ̂XN =2
k=1
1−/ ̂� �k−1 2k − 1
4N;
which, for N large enough, is approximately
T /̂� �
g2−/̂
4N /̂t: □
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