The institutional politics of development finance: ODA’s role in shaping subnational DFI investments

Abstract

Abstract Development finance institutions (DFIs), operated by donor governments to support private sector development in the Global South, often face informational barriers when deciding where to invest abroad. We argue that traditional Official Development Assistance (ODA), delivered through bilateral aid agencies, can guide these investment decisions. Specifically, aid agencies generate valuable, location-specific, investment-relevant knowledge through their ODA-funded activities across regions of the Global South. When shared with DFIs, this information reduces uncertainty and increases the likelihood of DFI investment in those same regions. To test this expectation, we leverage an original geocoded dataset comprising investments by 12 DFIs from 12 OECD-DAC donor countries, matched with subnational ODA data from the GODAD dataset for the period 2000–2020. Our quantitative analyses reveal a robust and consistent association between ODA activity and DFI entry at the subnational level. To probe the mechanism, we conduct qualitative case studies of Germany, France, and the United States, illustrating how aid agencies and DFIs exchange information and coordinate investment decisions. Our findings contribute to a growing literature on the spatial allocation of development finance and provide new insight into how traditional ODA and national DFIs interact as part of an evolving development cooperation bureaucracy.