Interdependence of Commercial and Donative Revenues

The financial health of nonprofit organizations depends on their ability to generate donations and to sell services profitably. Are these two sources of revenue - one philanthropic, the other commercial - interrelated? More particularly, does a change in donative revenue (e.g., a cut in government grants), influence nonprofits' commercial activity, or vice versa? We examine the hypotheses that nonprofits' commercial sales activities are mechanisms for financing their principal, tax-exempt, mission and that nonprofits prefer to avoid such activities, engaging in them reluctantly and then only for their profitability. A testable implication of this is that those activities are undertaken to a degree that varies inversely with the nonprofit's revenue from the preferred source, donations. If there is aversion to commercial activity, despite its potential financial contribution to the organization's mission, then donations would "crowd out" commercial activities, with decreased donations causing expansion of commercial activity and increased donations diminishing it. Using data for 2,679 nonprofits observed from 1985 to 1993, we estimate a set of structural and reduced form models that suggest exogenous declines in donations result in significant increases in commercial activity for some industry sectors, but not for others. This variation is understandable in light of differential organization goals as well as differential interdependencies among revenue sources and among costs of providing mission-related and ancillary goods production.