Donaldson was born in Ballarat, Victoria, Australia, and in 1965 emigrated to New Zealand, where he established a small still photography business and began making adverts. Donaldson was also directing documentaries, including an adventure series featuring Everest-conquering New Zealander Edmund Hillary, and his first ventures into drama. Donaldson and actor/director Ian Mune collaborated on a number of projects for television, including anthology series Winners and Losers, based on short stories by New Zealand authors.

In 1976, Donaldson directed and produced his first feature Sleeping Dogs. The film starred Mune and Sam Neill as two men fighting for their lives in a totalitarian New Zealand. He followed it with Smash Palace, starring Bruno Lawrence as a man who kidnaps his daughter after his marriage disintegrates.

Donaldson went on to direct many popular and successful movies, including his breakthrough American hit thriller No Way Out (starring Kevin Costner and Gene Hackman), barmen romp Cocktail (starring Bryan Brown and Tom Cruise), volcano disaster movie Dante’s Peak (starring Pierce Brosnan and Linda Hamilton), and Thirteen Days (starring Kevin Costner), an account of the Cuban Missile Crisis. He also directed science fiction tale Species, and in 2003, the Al Pacino and Colin Farrell film The Recruit. He also wrote and directed The World’s Fastest Indian starring Anthony Hopkins and depicting Burt Munro’s successful attempts at motorcycle speed records at Bonneville Salt Flats in the 1950’s. The film was released in 2005.

In the 2018 Queen’s Birthday Honours, Donaldson was appointed an Officer of the New Zealand Order of Merit, for services to film.