Using a growth model with entrepreneurial innovation and physical capital accumulation, we assess how the design of foreign aid program may a¤ect the economic transition in receiver countries. The results highlight the importance of transitional dynamics in analyses of economic policy. We …nd that foreign aid programs aimed at innovation are more e¢cient in the long run than subsidies to physical capital investment, provided the number of di¤erent products is below the optimal level chosen by the social planner. However, the adjustment speed to the new steady state is higher when the subsidy to physical capital investment is applied instead of the subsidy to innovation. The high adjustment speed has a positive impact on private consumption in the short to medium term, and the ranking of instruments in terms of welfare may therefore change.