Financing development

External finance through FDI

Foreign Direct Investment (FDI) refers to the flows of real capital between countries that accompany overseas investment decisions. A single flow of capital between two countries can be described as outward for the investing country and inward for the recipient country. Both private sector firms and by governments undertake FDI.

Government assistance

Governments can help provide financial aid for developing economies, called foreign aid, in two ways; from bi-lateral aid, which is assistance directly from one country, and from multi-lateral aid, which means giving assistance to more than one country, usually through an agency or through charities.

Official development aid (ODA)

There are two basic types of ODA – long term aid to relive poverty and short term humanitarian aid for relief following disasters. In 2009, the UK’s development assistance totalled £7.3 billion ($11 billion) approximately 0.55% of its GDP. (Source: DFID – The Department for International Development, 2010). The UK has agreed to implement the UN Millennium aid goal of 0.7% of GDP by 2015. The USA is the single biggest provider of development aid. In 2015, total world ODA was $152.5bn. (Source: OECD).

Aid Flows

ODA Trends

Aid Flows 2015

Courtesy of the OECD

Targeting aid for specific purposes is probably the most useful type of aid, such as the eradication of a specific disease like malaria, and to relieve the immediate effects of natural disasters, such as the Far East tsunami. However, aid spending only represents a small % of global GDP and received aid only represents a small % of the recipient country’s GDP.

Bilateral aid may have strings attached, in which case it is referred to as tied aid. For example, aid may be dependent on the recipients allocating contracts to the donor countries, such as contracts to build infrastructure.

Some critics, such as the Peter Bauer (Lord Bauer), have argued that aid can be disastrous, and can trap poorer countries into a life of aid dependency. The late Lord Bauer, of Cambridge and the LSE, was one of the UK’s strongest advocates of free trade to promote development, and the application of the price mechanism to mobilise resources to finance development, and as such was a strong critic of overseas aid.

Non-governmental organisations (NGOs)

NGOs are not-for-profit organisations that act as pressure groups, representing the interests of members, or the interests of other groups. NGOs frequently advocate particular policies, and promote these in discussions with governments and their agencies. The world’s oldest and largest NGO is the International Red Cross, whose main aim is to provide humanitarian aid to war or disaster affected countries.

The UN Industrial Development Organization (UNIDO) analysed the role of NGOs and suggested that they provided a number of key benefits, including:


There is local accountability of locally based NGO, such as the 250 independent NGOs operating in Kenya (Source:


NGOs are independent of government and can arrive at independent assessments of the needs of a country.

Information and expertise

NGOs can undertake research, provide information and expertise, and attempt to raise awareness of the needs of developing countries.

(Source: UNIDO)


Because of the lack of a financial infrastructure, development in many countries is very slow. Microfinance initiatives encourage people to lend small amounts to others to enable them to set up small businesses.

Microfinance initiatives (MFIs) started in Bangladesh in the early 1980s, and became so popular that they are common in many areas of the developing world, especially India and Africa. The first bank to specialise in small micro-loans was the Grameen Bank in Bangladesh.


Remittances, which are transfers from migrant workers back to their country of origin is an increasingly important source of finance for development, and globally they exceed ODA as a source of finance.

Go to remittances