Economic theory purports that competition promotes innovation in the private market. In the third sector, however, the role of competition is uncertain where multiple nonprofits working towards the same goal likely means higher transaction costs from increased fundraising, marketing, and salaries.  Disease-specific nonprofits are driven to find a cure for a disease, improve treatments, and provide patient support and advocacy. In recent years they have become more aggressive in their funding of research and vocalizing their needs in public discussions and debates, even if their cause affects a small number of people. However, even with this increased attention, funding, and new approaches to finding a cure, the rate of progress is still slow.

Disease-specific nonprofits often focus on diseases that affect a small proportion of the population and/or have not been viewed as potentially profitable by pharmaceutical research companies.  Many of these organizations are employing a more engaged funding strategy, a venture philanthropic approach.  Venture philanthropy is a results-oriented funding model that aims for grants to be investments rather than gifts. They provide administrative support, maintain an active presence with the grantee, and evaluate outcomes. Public charities and foundations are applying this model as they fund translational over basic research and fund pharmaceutical companies along with academics to do this research. They are providing larger grants on average than industry and are also stipulating control over intellectual property rights and royalty payments, expanding their sources of revenue. Yet, this approach is still producing limited commercialization.

This paper develops an innovation production function for disease-specific nonprofits. The model derives the conditions that promote progress, and which deter it, given a nonprofit’s desire to find a cure for a disease, with careful attention to the role of competition in various institutional settings.  Research-related outcomes of clinical trials, drugs and treatments to market, and increases to lifespan are used as innovative outcomes from a nonprofit’s research investment. Organizational and institutional factors surrounding their disease are also used, including the formation of research partnerships, fundraising and marketing expenditures, number of nonprofits focused on the disease, spread of the disease, and public dollars spent towards research and treatment.

Using econometric analysis, the theoretical model is then empirically tested using data from the annual IRS Form 990. The data used includes demographics, financial information on revenue and expenditure streams, and details of the grants made by the organization. This paper contributes to the literature on research and development and nonprofit competition.  It expands the discussion through the development and evaluation of the factors that affect innovation in the face of evolving philanthropic practices.