The US agency for international development, USAid, will no longer have to "buy American", thanks to a policy change that will open up the agency's contracts to firms in developing countries and could herald a significant shift in how the world's largest aid donor does business.

The US, which spent $30.4bn in official development assistance in 2010, is known for its policy of "tied aid" – foreign aid that must be spent on goods and services purchased from companies in donor countries.

But last month, USAid revised its procurement regulations. The new rules, which come into effect on Monday, will allow the agency to purchase most goods and services from developing countries, with notable exceptions including US-funded food aid, motor vehicles and US-patented pharmaceuticals.

"We want to work with a broader range of partners and increase competition," said Lisa Gomer, who is leading the procurement reform. She said the agency's broader reform effort, called USAid Forward, represents a "different philosophical approach to development".

Historically, the US aid agency was required to source its supplies from American companies and could only "buy locally" on an ad-hoc, case-by-case basis. Critics said this led to USAid paying higher prices for crucial goods and services, and that "buying American" hobbled local economies and did little to end dependence on foreign aid.

Gomer said shrinking staff numbers combined with increasing aid budgets over the last decade pushed contracting officers to follow a "path of least resistance", opting to employ large, experienced contractors at the expense of developing relationships with smaller firms.

In 2011, a small group of US-based companies and consultancies, including Chemonics International and John Snow Inc, together made billions in USAid funded contracts.

In 1993, the US congress ruled that American foreign assistance could buy goods and services from developing countries, but USAid did not update its procurement policies.

"The letter of the law has actually given USAid a lot of flexibility in contracting and procuring locally," said Gregory Adams, Oxfam America director for aid effectiveness. "The problem is, due to general political pressure, they've had some very conservative rules in what they do with that flexibility."

Adams says some large companies are likely to lose business if USAid's procurement reforms are fully implemented, and that there's "likely to be push-back". But Gomer insisted the new approach will save USAid money in a time of tightening budgets.

Scott Gilmore, executive director of the US non-profit Peace Dividend Trust, says "using aid dollars is a very wasteful way to create American jobs", and praised USAid leadership for breaking "the deathgrip" of the large American companies, which have come to dominate work with the agency.

Gilmore said he hopes the decision to open up USAid contracts to developing countries will encourage other donors to follow suit. "If USAid can get behind spending locally, it eliminates excuses for everyone else."

The new rules do not extend to US-funded food aid. Under federal law, the vast majority of American food aid must be bought from US suppliers and transported on US ships. Also exempt from the new regulation are motor vehicles, which must be made in America, and US-patented pharmaceuticals, which can only be manufactured outside America with express permission from the patent holder. The procurement changes do not extend to other US agencies that spend foreign assistance.

"We'd love to see USAid be bolder on these things but we also understand you need to walk before you can run," says Adams.

As part of the wider USAid Forward reform, the agency says it will work to increase the number of contracts awarded to small, disadvantaged, and women-owned businesses in the US, and will take steps to engage more directly with small non-profits both in the US and abroad.

Adams stressed that proof of the agency's priorities will come in how reforms are implemented. "Ultimately it's not about what the rules say on how much aid is tied or untied. The real measure of success is how much money is actually spent in a partner country."

The UK formally "untied" all development assistance in 2001, with the justification that "tied aid reduces value for money", and tends to lead to inappropriate and expensive projects that do little to tackle the needs of the poorest. But, according to Eurodad, a network of European NGOs, 44 out of 54 UK aid-funded contracts in 2007 went to British firms.