Technology may stay when the money leaves

The skills and knowledge of foreign companies can help to develop a country, and if they transfer to domestic companies, could remain after the foreign companies leave. One macroeconomic mechanism for the transfers occurred to me today when reviewing the literature on exchange rates.

The exchange rate research suggests a mechanism by which long run domestic income could be raised by a change in domestic money. It works like this:

1. Domestic money is inflated a little
2. Consumption rises because prices domestically and internationally are sticky in the short term
3. Some of the consumption is on foreign bonds
4. Prices adjust in the long term
5. The purchased bonds continue to pay interest.

The sequence amounts to a transfer from the foreign country to the domestic country. There are analogous transfers when looking at one country alone, such as where small unexpected inflationary increases can result in a financial transfer from producers to consumers. Incidentally, a systematic attempt by government to exploit the mechanism is likely to result in retaliation and a possible inflationary spiral.

Back to technology, which could be inserted in the mechanism to take the place of bonds in a direct way, although the other stages have to be adjusted a little. The new mechanism for technology spread could be:

1. Domestic money is deflated a little (equivalently, foreign money could be kept as reserves)
2. Foreign consumption rises
3. Some of the expenditure is on foreign direct investment, and technology transfer results
4. Prices correct in the long term
5. The technology transfer remains

I think this mechanism may not rely exclusively on price stickiness, and so may able to be exploited more systematically. Exporting countries which maintain artificially low exchange rates may be doing just that.

I am not sure whether the approach should be considered a gain to the technology receiver at the expense of the technology sender, even if the sending country would not choose the approach from all possible money-mediated outcomes. Although the strategy creates new competition for the sender in the long run, it also promotes the development of the receiver so that they may become partners on a more equal, profitable basis. Underpricing of developing countries' currencies may - on this narrow measure - be Pareto optimal.