A substantial section of nongovernmental organizations (NGOs) in the global South depend on foreign funds to conduct their operations. This paper explores how the availability of foreign funding affects their downward accountability, abilities to effect social change, and their relative influence in relation to traditional grassroots, membership-based organizations (GROs), which tend not to receive such funding. Drawing on a case study of Nicaragua, we challenge the notion that foreign funding of domestic NGOs leads to the evolution of civil society organizations, which have incentives and abilities to organize the marginalized sections of society in ways to effect social change in their interests. Instead, we find that foreign funding and corresponding professionalization of the NGO sector creates dualism among domestic civil society organizations. Foreign funding enhances the visibility and prestige of the "modern" NGO sector over traditional GROs. This has grave policy implications because foreign-funded NGOs tend to be more accountable to donors than beneficiaries and are more focused on service delivery than social change-oriented advocacy.