Financial Field of Dreams

On the northern edge of Shanghai Jiao Tong University stands a relatively new 12-story building, with a suitably academic-sounding name on the façade: The Shanghai Advanced Institute of Finance (SAIF).

The Shanghai government launched SAIF two years ago as an initiative to develop a stronger financial talent base for the city, part of the government’s aim to make Shanghai a world-class center for the financial industry. Startup capital from the city was widely reported to be about $45 million.

The facilities are world-class (including a 40-station virtual securities trading center, as yet rarely used), and SAIF already has 13 full-time faculty (out of a total of 30 or so). Since this is a finance-focused institution, let’s consider its financial structure, starting with costs:

– Any visitor can see that the reformatting of the building for use by an academic institution, with classrooms and breakout rooms in addition to offices, was obviously an expensive undertaking, requiring much of the $45 million government seed money. SAIF would need to make millions per year, over many years, to recoup this initial investment. That’s not likely in the near future, nor is it likely a primary concern for the government, which surely views the potential ROI for SAIF in terms beyond net financial profitability.

– B-school faculty are typically among the highest-paid at any given university because the market values their time more highly than, say, that of humanities faculty. Moreover, in the West, finance faculty are the most highly paid among the b-school academic disciplines because the private financial sector, with all its wealth, also competes for them – the (surviving) investment banks are still eager to hire quant jocks. Before the financial crisis, freshly-minted PhDs from decent schools in the US were getting US$200,000 per year in starting salary. So corralling a stable of 30 finance faculty, with about a dozen of them being full-time, and all from academic institutions in North America, probably represents a line-item expense of between US$3 million and US$4 million per year for SAIF.

– SAIF has about 50 full-time staff, virtually all local, so total staff costs should be somewhere around one-half of faculty costs.

– All other costs are relatively trivial, assuming the government is not charging SAIF rent.

Notwithstanding its inability to recoup sunk costs, on the income side SAIF already shows powerful potential, reminding one of the tagline from the old movie Field of Dreams: "if you build it, they will come." One example: Its first EMBA class, launched in 2009, is already at full capacity. With annual tuition at RMB430,000 (US$64,313), even if SAIF grants full scholarships to 25% or so of their students, the institute still receives enough tuition income to cover all faculty salaries.

SAIF also gains revenue from its MBA programs, plus research grants. (It has just launched a non-degree-conferring executive education initiative, which may eventually generate substantial revenue as well, though non-degree executive education is an exceptionally competitive sector here.) So it’s reasonable to assume that SAIF is at least breaking even on an operating basis.

The research grants point at something that offers perhaps the most promise for SAIF in the future. Many internationally affiliated business education initiatives in China have little or no research component. SAIF’s full-time faculty all have research as a required component of their contribution. Having not only a substantial and growing full-time faculty component, but also having those faculty do what faculty do at leading institutions worldwide – both teach and research – gives SAIF an unusual foundational strength.

One regularly sees criticism of various branches of the Party and government in China, as one does of the governments of every country. SAIF seems an example of something the cadres got right.

John D. Van Fleet works in the university sector in China. He lives in Shanghai.