Introduction

Global commitment to foreign aid is shrinking. In 2025 and 2026, France cut its aid budget by 37 percent, the UK lowered its commitment from 0.5 to 0.3 percent of national income, and the US reduced its budget by 16 percent while dismantling USAID (ODA Korea, 2026). The Republic of Korea (ROK) followed with a 16.4 percent cut this year (ROK Ministry of Foreign Affairs, 2026). Yet demand for climate, humanitarian, and health assistance keeps rising, widening the gap between what donors offer and what the world needs.

With donors offering less and the world needing more, every aid dollar must work harder. Donor governments increasingly want evidence that aid serves their own interests as well as those of recipients.

Korea's distinctive answer to this pressure is digital public infrastructure (DPI), which refers to the foundational digital systems a modern economy requires: digital identity, online tax administration, electronic payment platforms, and e-government services (UNDP, 2023). The provision of such platforms constitutes a core Korean ODA strategy, one which explicitly links aid to the expansion of economic cooperation with recipient countries and the overseas advance of domestic firms (Export-Import Bank of Korea, 2023).

This raises the question: Under what conditions does Korea’s DPI ODA generate commercial spillovers for the donor while supporting institutional capacity in recipient countries?

Strategic Allocation of ODA

Official Development Assistance (ODA) is meant to support the economic and institutional development of recipient countries. But a substantial body of research shows that aid also tends to expand the donor’s exports and foreign direct investment (FDI).

Aid’s mitigation of the costs and risks of doing business abroad is called the Vanguard Effect, because it actively paves the way for the donor’s firms to follow. Kimura and Todo (2010) documented this pattern for Japanese aid and FDI, while Wagner (2003) and Pettersson and Johansson (2013) found similar links between aid and donor exports.

Korea has been transparent about pursuing this kind of strategy. Its policy framework speaks of "common prosperity" and "win-win" partnerships, treating ODA as both a development tool and a deliberate intervention to build a more Korea-friendly business environment abroad (Export-Import Bank of Korea, 2023). Korea’s signature contribution within this framework is digital public infrastructure (DPI).

Korea’s DPI ODA

Korea is internationally recognized as a leader in e-government and digital administrative systems, and has used ODA to transfer its domestic digital infrastructure models to recipient countries. In particular, Korea has set the promotion of economic cooperation with recipient countries as an explicit policy goal centered on a concessional loan framework through EDCF, and officially acknowledges the facilitation of Korean firms’ market entry into recipient countries as an ancillary ODA objective (Export-Import Bank of Korea, 2023; Government of Korea, 2021). This means Korea’s DPI ODA allocation has the character of strategic allocation linked not only to needs-based logic but also to its own commercial interests.

To see why DPI matters commercially, it helps to introduce the idea of transaction costs, the costs of carrying out an economic exchange external to the price of the good itself. These include the costs of finding trading partners, verifying their identity, transferring payments, navigating customs, and enforcing contracts. Transaction costs are often invisible but consequential: when they are high, trade that would otherwise be profitable simply does not happen.

Just as roads and ports lower the costs of physically moving goods, DPI lowers transaction costs in customs clearance, payment approval, and data verification. It makes administrative procedures faster, payments more secure, and identities easier to confirm across borders.

Korea is an active DPI donor, transferring various platforms like UNI-PASS for electronic customs and KONEPS for e-procurement to partner countries. But recipients adopt more than software: they also take on the administrative procedures, certification standards, and operational templates built around Korean systems. This deep institutional transfer is what gives DPI aid its strategic potential. Whereas ports lower transportation costs for all users equally, DPI may lower transaction costs asymmetrically, creating advantages for firms already familiar with the underlying architecture.

But does this theoretical advantage actually translate into observable trade and investment?

Estimating the effects of DPI ODA on trade

Identifying which projects qualify as DPI is harder than it sounds. The OECD’s Creditor Reporting System (CRS), the global standard database for aid projects, has no DPI category, so DPI projects sit scattered across many sector codes, described mostly in unstructured project text.

We began with more than 83,000 Korean aid project records from the Korea International Cooperation Agency (KOICA). Building on the UNDP definition of DPI, we developed a three-way classification: Core DPI (digital ID, payments, e-government), Adjacent DPI (connectivity, data systems), and Non-DPI. We then used a large language model (LLM) to classify each project according to this taxonomy. Three trained research assistants independently validated the classifications, agreeing with the LLM’s labels 98.2 percent of the time.

This produced a dataset of 5,523 DPI-related projects, which we matched to Korea’s bilateral trade and investment flows with 146 recipient countries from 1987 to 2024. Using standard panel-data methods, we examined whether DPI aid in a given year predicted higher exports, imports, or FDI in the years that followed.

What the evidence tells us

Korean DPI aid is associated with higher Korean exports and outward investment in the years that follow. A 1 percent increase in DPI aid is associated with roughly 0.44 percent higher Korean exports to that country in the following one to two years, alongside measurable growth in Korean FDI.

The effect is conditional. DPI aid generates these spillovers more strongly in countries with greater internet penetration and stronger logistics systems, i.e., in countries with the practical capacity to implement and use the digital infrastructure being installed. By contrast, broad governance indicators (control of corruption, rule of law, government effectiveness) do not play the same amplifying role. Concrete digital and logistical capacity matter more than general institutional quality.

The trade effect is asymmetric. Korean DPI aid shows no consistent relationship with imports from recipient countries to Korea. This pattern is what theory predicts: DPI lowers search and information costs in ways that help Korean firms enter foreign markets, but it does not, on its own, generate new exportable products for the recipient country.

Figure: How Korea’s DPI ODA lowers transaction costs and generates asymmetric commercial spillovers. The dashed line indicates no consistent effect on imports.

This asymmetry does not mean recipients fail to benefit. They do, but through channels that fall outside bilateral trade.  Experience with digital platforms worldwide illustrates the scale of these gains. E-customs platforms have been reported to expand customs revenue and domestic resource mobilization by 20–30 percent (UNCTAD, 2002). E-payment systems expand financial inclusion, with examples from countries like Ethiopia, which more than doubled the number of adults with bank accounts in six years (Kebede et al., 2024). Digital ID improves administrative efficiency and broadens access to public services (Jabbour and Tullis, 2024). These gains remain inside the recipient country and do not register in trade statistics, but they are substantial.

Why this matters

Donor countries are cutting aid budgets under mounting fiscal pressure and intensified domestic priorities. Appeals to pure benevolence are losing political traction. Our findings suggest, however, that aid need not be framed as a zero-sum choice between altruism and self-interest. When designed well, ODA can deliver both development outcomes for the recipient and commercial returns for the donor.

Our research offers one clear implication: Aid should be allocated where recipients have the capacity to use it—and that capacity should be built where it is missing. Our results show that DPI spillovers are strongest where recipients already have sufficient internet penetration and logistics infrastructure, while broader governance indicators play no amplifying role. For countries with that foundation in place, DPI ODA delivers returns for both the donor and the recipient. For countries without it, the appropriate prior step is investing in the complementary infrastructure—connectivity, logistics, and a digitally skilled workforce—that enables digital absorption. Designing aid with this conditionality in mind is how donor governments can maximize both development impact and commercial returns.

The future of development cooperation is unlikely to be won by appeals to pure benevolence, but with a justification. This research therefore shows that with the right approach, projects can be designed to favor both the donor and the recipient. We hope the findings and the direction we provided will contribute to the narrowing of the gap of ODA demand and supply by promoting efficient and effective donor commitments.

This blog post draws on research conducted through the KU Development Futures Lab Student Research Residency Programme, supported by the UNDP Seoul Policy Centre. The underlying study, “Digital ODA as a Conditional Vanguard: Evidence on Trade and FDI from Korea,” was co-authored by Soomin Park, Sojeong Lee and Seungwoo Yoo.

This article represents the views of the authors and does not reflect the views of UNDP.

About the United Nations Development Programme

UNDP is the leading United Nations organization fighting to end the injustice of poverty, inequality, and climate change. Working with our broad network of experts and partners in 170 countries, we help nations to build integrated, lasting solutions for people and planet. Learn more at undp.org or follow at @UNDP.

About UNDP Seoul Policy Centre

UNDP Seoul Policy Centre is a facilitator of innovative development cooperation to catalyse the achievement of the Sustainable Development Goals. Through its SDG Partnerships programme and other South-South and Triangular Cooperation initiatives, the Centre supports countries by sharing innovative, tested-and-proven practices and policy tools on strategic development issues globally. Learn more at undp.org/policy-centre/seoul or follow at @UNDPSPC.

References

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• Kebede, T. T., Di Salvo, F., & Admassu, L. K. (2024, March 15). Leveraging e-payments for financial inclusion in Ethiopia. Nasikiliza. https://blogs.worldbank.org/en/nasikiliza/leveraging-e-payments-financial-inclusion-ethiopia-afe-0324
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