External Environments Matter: The Effects of Contextual Factors on the Financial Health of Chinese Foundations

Abstract Foundations operate within external influences, requiring contextual factors to comprehensively assess their financial health. Our study investigates how political and economic environments—represented by political connections, accreditation evaluations, and the city of establishment—affect foundations’ financial health, measured by equity adequacy, operating margin, revenue diversification, and administrative cost ratio. We hypothesize that government connections enhance financial health by providing funding stability and regulatory legitimacy. These connections confer legitimacy, reflected in accreditation evaluations, which enhance public trust and attract diverse financial support. Thus, we propose that foundations with higher accreditation evaluations demonstrate stronger financial health. We further expect foundations in economically developed cities to exhibit stronger financial health due to more vibrant markets and networks. We use data on Chinese foundations, a legally defined category of nonprofits in China, alongside social associations (社会团体) and social service organizations (社会服务机构), and comparable to charitable nonprofits in the United States. Our findings reveal that politically connected foundations exhibit stronger equity adequacy, higher operating margins, and greater revenue diversification. Foundations with better accreditation evaluations show greater revenue diversification but weaker net asset accumulation. Foundations in developed cities report lower net asset accumulation and higher administrative costs. These results underscore that financial health cannot be fully understood through financial metrics alone; external political and economic environments provide essential context. Foundations should strategically align their financial and charitable activities with their external environments to achieve sustainable financial health.