High tuition fees risk turning foreign students away from UK universities and "killing the sector's golden goose", according to the Higher Education Policy Institute.
A Hepi report, The Economic Costs and Benefits of International Students , says Britain should subsidise students from outside the European Union directly from taxation to keep tuition fees down and keep the UK competitive. International students provide £1.5 billion a year in tuition fees, but Hepi director Bahram Bekhradnia said this income is at risk from competition from countries such as Germany, which allow international students to attend free of charge.
"There are more than 250,000 international students in Germany, and they cost the state £1 billion a year. Yet the German Government is willing to pay the universities to take the students because of the even greater benefits they bring," he said.
Hepi has calculated that fee income and living expenditure from overseas students from outside Europe contribute at least £3.3 billion annually to the UK economy. The rise in gross domestic product resulting from international students who stay to work in the UK is about £1 billion a year.
Mr Bekhradnia said it was clearly worth Britain's while to maximise numbers of international students, but current tuition fees were a deterrent.
As more countries use English as the language of instruction, other countries have begun to market their higher education institutions more aggressively. Better access to information means students can compare the value they receive for their money, and UK universities will struggle to maintain numbers while charging fees at current levels, Mr Bekhradnia warned.
Haydn Bartlett, director of the international office at Bradford University, which earns 18 per cent of its income from overseas students, said that, aside from scholarships, subsidies would not be sustainable in the long term. "We have to demonstrate that a degree from a UK university is something worth having and worth paying for," he said.
Les Ebdon, vice-chancellor of Bedfordshire University, also disagreed with Mr Bekhradnia. "If there is more money to support our universities, it should go towards improving teaching infrastructure, as our facilities lag behind those elsewhere," he said.
David Willetts, the Shadow Higher Education Minister, said improving the quality and "sensible administration" of visa rules would do more than tuition subsidies to win the recruitment battle for international students.
Steve Smith, vice-chancellor of Exeter University, said quality was still the UK's "trump card". "If we give the impression that we're in a souk, where all prices are up for negotiation, we risk devaluing our brand and reputation for quality," he added.