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TRANSFER OF TECHNOLOGY TO LATIN AMERICA

The Development of Indigellous Technology as the Basis for Economic and Social Progress

by

Monica Cordovez

A Thesis submitted to the Faculty of Graduate Studies and Research in partial fulfillment of the requirements for Master's Degree

McGill University, Montreal August 1991

(c) M6nica Cordovez, 1991

TABLE OF CONTENTS

ABSTRACf i

INTRODUCfION ii

FJRST CHAPTER TRANS FER OF TECHNOLOGY TO DEVELOPING COUNTRIES

I. GENERAL ASPECTS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. 1

A. CONCEPTS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. 1

1. Technology ... . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. 2 2. Transfer of Technology . . . . . . . . . . . . . . . . . . . . . . . .. . 4

II. DEVELOPING COUNTRIES' MAIN CONCERNS REGARDING THE TRANSFER OF TECHNOLOGY PROCESS . . . . . . . . . . . . . .. 8

A. TECHNOLOGICA L DEPENDENCE . . . . . . . . . . . . . . . . . . .. 8 B. APPROPRIATENESS OF TECHNOLOGY .............. 12 C. CaST OF THE TECHNOLOGY ...................... 15 D. DEVELOPMENT OF INDIGENOUS TECHNOLOGY 18 E. RESTRICTIVE PRACTICES .. . . . . . . . . . . . . . . . .. ..... 21

1. Export Restrictions ..... . . . . . . . . . . . . . . . . . . . . . .. 22 2. Grant-back provisions ... . . . . . . . . . . . . . . . . . . . . . .. 24 3. Tying Clauses ......... . . . . . . . . . . . . . . . . . . . . . .. 25 4. Priee-fixing. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. 26 5. Challenges to validity .......................... 26 6. Restricdons on Research and Development . . . . . . . . .. 27 7. Restrictions on the use of personnel ............... 27 8. Patent pool or cross-licensing arrangements . . . . . . . . .. 28 9. Payments and restrictions after expiration of industrial

property rights ............................... 29 10. Restrictions after expiration of the arrangement. . . . . .. 30 Il. Duration of the agreements . . . . . . . . . . . . . . . . . . . . .. 30 12. Restrictions on the recipient's volume of

production, field of activity or territory ............. 31 13. Exclusive sales or representation agreements . . . . . . . . 32

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1 SECOND CHAPTER METHODS FOR THE TRANSFER OF TECHNOLOGY

I. SELECTICN CRITERIA ................................. 34

A. CONTROL OVER TRANSFERRING PROCESS . . . . . . . . .. 36 B. NATURE AND DEGREE OF PACKAGING ............. 40

II. LEGAL AGREEMENTS FOR THE TRANSFER OF TECHNOLOG y 41

A. SALE OR ASSIGNMENT OF INDUSTRIAL PROPERTY RIGHTS ............... .... . . ... . .. . .. ... ... .. . .. 41

B. LICENSING AGREEMENTS. . . . . . . . . . . . . . . . . . . . . . . .. 42

1. General Aspects ............ , . . . . . . . . . . . . . . . .. 42

2. Remuneration for the Tec'nnology supplied .......... 44

3. Foreign Trademarks Licensing Agreements .......... 48 a. Concept and Functions of Trademarks ........ 48 b. Benefits of Foreign TraJemarks Licensing . . . . .. 49 c. Disadvantages of Foreign Trademarks Lkensing. 50

4. Patent Licensing Agreements " . . . . . . . . . . . . . . . . . . .. 57 a. Benefits of Patent Licensing ................ 59 b. Disadvantages of Patent Licensing . . . . . . . . . . .. 60

5. Know-how Licensing Agreements ................. 60 a. Technical Assistance agreements. . . . . . . . . . . .. 61 b. Training of local personnel ........ ........ 62 c. Management arrangements ................. 63

HI. COMMERCIAL ARRANGEMENTS FOR THE TRANSFER OF TECHNOLOGY ........................................ 64

A. TURN-KEY PROJECTS . . . . . . . . . . . . . . . . . . . . . . . . . . . .. 64 B. JOINT VENTURES.. .. . .. .. . . . .. . . . . . . . . . . . .. . . . .. 67 C. MARKETING ARRANGEMENTS .................... 70

1. Distributorship. . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. 71 2. Franchising . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. 7]

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<. THIRD CHAPTER LATIN AMERICAN HEGIMES FOR THE REGULATION OF TRANSFER OF TECHNOLOGY: Focus on Meyjco and the Andean Common Market

1. MEXICAN POLICY TOWARDS THE TRANSFER OF TECHNOLOGY

A. Background ........................................ 75

1. The 1972 Technology Law . . . . . . . . . . . . . . . . . . . . . . .. 83

B. Analysis of the 1982 T~chnology Law ..................... 86

1. \\-'ho must register? . . . . . . . . . . . . . . . . . . . . . . . . . . . .. 87 2. Agreements subject to registration . . . . . . . . . ... . . .. 88 3. Grounds for denial of registration .................. 91

a. Analysis of Article 15 ...................... 92 (1) Supplier's intervention in management .... 92 (2) Grant-back clauses .. . . . . . . . . . . . . . . . . . 93 (3) R & D Restrictions .................. 94 ( 4) Tied purchases . . . . . . . . . . . . . . . . . . . . . . 94 (5) Export Restrictions ................... 95 (6) Complementary technology ............. 96 (7) Exclusive sales agreements ............. 97 (8) Personnel designated by Supplier ........ 97 (9) Sale or resale prices/ limitation of

production volumes .................. 98 (10) Confidentiality ...................... 99 (11) Infringement of third parties industrial

property rights .................... 100 (12) Guarantee of the quality of technology ... 100

b. Analysis 01 Article 16 ..................... 101 (1) Technology alr~aQy available in Mexico. 101 (2) Consideration payable ............... 101 (3) Excessive duration of the agreement ..... 105 (4) Dispute Resolution . . . . . . . . . . . . . . . . .. 107

c. Legal Recources against Resolutions denying RegIstratlon ................................. 107

d. Analysis of Article 17 ..................... 109

e. Sanctions. . . . . . . . . . . . , . . . . . . . . . . . . . . . .. 111

1 c. EFFECf OF THE LAW ON THE FLOW OF TECHNOLOGY TO MEXICO ........................................ III

Ii. ANDEAN COMMON MARKET'S POLICY TOWARDS THE TRANSFER OF TECHNOLOGY ..................................... 118

A. Overview: From LAFT A to Decision 220 ................ 118

1. ANCOM General Policies toward Foreign Investment: A Comparative Overview of Decision 24 and Decision 220 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. 125

a. Remittance and Reinvestment . . . . . . . . . . . . . .. 127 b. Credit Regulations ....................... 127 c. Dispute Resolution ................... , . .. 128 d. Divestment or Fade-out ................... 128

B. TRANSFER OF TECHNOLOGY PROVISIONS IN DECISION 24 AND DECISION 220 .................... 129

1. General criteria. . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. 130 2. Restrictive practices ........................... 132 3. Regulation of royalty payments ................... 133 4. Other changes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. 136

C. EFFECT OF THE LAW ON THE FLOW OF TECHNOLOGY TO THE ANDEAN REGION ........... 137

CONCLUSION ..................... , .... 142

Table 1 ........................... 145 Table 2 ........................... 147 Appendix . . . . . . . . . . . . . . . . . . . . . . . . . . .148

BIBLIOGRAPHY ..................... , ... 149

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ABSTRACT

The acquisition of foreign technology is an imperative requisite for the economic and social progress of developing countries. However, the strong bargaining position of technology suppliers vis à vis technology acquirers unduly influences the terms and conditions under which technulogy is conveyed to developing countries and perpetuates their dependence on foreign sources of technology.

State intervention -through the enactment of technology transfer legislationis a viable alternative for strengthening the acquirer's bargaining position, and thus obtaining technology under fair and equitable terms. Technology transfer policies mtast focus on the generati~n of indigenous technological capabilities, rather than on the mae importation of consumptive technology. In order to achieve their ultimate goals -social and economic progress and technologicaI self-reHance-, developing countries' governments must integrate these policies within concrete and Jong-term economic development programs.

RÉSUMÉ

L'acquisition de technologies étrangères est essentielle à la progression économique et sociale des pays en développement. Or, la supériorité des fournisseurs de technologies vis-à-vis des acquéreurs influe démesurément sur les modalités et condi tions des transferts de technologies dans les pays en développement et perpétue leur dépendance vis-à-vis des sources étrangères de technologies.

L'intervention de l'État (par la promulgation de lois sur le transfert des technologies) constitue un moyen viable pour renforcer la position des acquéreurs à la table des négociations et leur permettre d'obtenir des technologies dans du conditions justes et équitables. Les politiques de transfert de technologies doivent insister sur le développement des capacités technologiques autochtones plutôt que sur l'importation pure et simple des technologies prêtes à consommer. Dans le but d'atteindre leurs objectifs fondamentaux (progression économique et sociale et autonomie technologique), les gouvernements des pays en développement doivent intégrer ces politiques à des programmes concrets de développement économique à long terme.

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INTRODUCTION

The extensive flow of technology tram industrialized countries to

developing countries has become a characteristic feature of current international

business relations. The transfer of technology, while critical for the economic and

social development of the so-called Third World, ha~, however, widened the

developmental gap between industrialized and developing countries. This

technological gap has become bath the cause and the effect of developing

countries' acute dependence on foccign sources of technolob'Y and capital.

Developing countries' views of the transfer of technology process have

gradually changed over the pa st de cades. During the 50's and 60's the acquisition

of technology was considered the ultimate solution to the prohlems of economic

and social backwardness. Few serious evaluations of the long term consequences

were made. Transfer of technology was thought to be an end in itself. In the past

three decades, however, the commercial and legal terms under which technolob'Y is

transferred to developing countries has been subject to serious scrutiny hy third

world governments, economists and analy~ts. Of partieular concern is the manifcst

inability of recipient eountries to make an effective use of the technolob'Y acquired,

in terms of its absorption and the generation of indigenous technology.

Furthermore, the abusive terms and conditions often included in technolob'Y

transfer agreements, mainly through restrictive practices, have resulted in

mounting dependence of developing countries' on foreign suppliers and have

contributed to the inerease of the balance of payment deftcits.

At the international level, Third World countries' efforts to redress this

increasing economic and social imbalance have found support in the Declaration

on the Establishment of a New International Economie Order and in the Charter

of Economic Rightf. and Duties. These United Nations' declarations embrace

developing eountries' rights to receive preferential and non-reciprocal treatment in

their pursuit of economic and social development and to take part in the benefits

of technological progress.

Developing cou nt ries have taken unilateral steps to overcome the

difficulties encountered in the transfer of technology process. AmOI~g the

developing countrie"! the Latin ~-nerican states took the first concrele steps

toward the regulation of the terms and conditions under which technology is

introduced in the region. The 1970's weI'-', characterized by increased ~tate

intervention in the revision of foreign investment, transfer of technology and

industrial property rights legislation of several Latin American cOllntries. These

countries' objectives W"le not to haIt or prevent altogether the flow of foreign

capital and technology ta the region, but to establish a concrete policy for the

regulation of such flow under conditions that complied with and stimulated the

programs for national development.

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The purpose of this study is to analyze the conditions under which

technology is transferred to developing countries and their effects on these

countries' developmental needs and objectives. Special attention will be placed on

the causes of developing ccuntries' lack of indigenous technological skills ami

infrastructures and its main consequence: their dependence on foreign sources of

terhnology.

The thesis is divided into three chapters. The First chapter IS a description

of the current state of the transfer of technology activity in developing countries.

1 t focuses on the needs and problems encountered by the se countries in the

acquisition of foreign technology, chiefly, the co st of technology and the inclusion

of restrictive practices in technolog.l transfer agreements, and their effects on the

balance of payments and overall perfOImance of both the acquiring enterprise and

country. It also discusses the probIem of the appropriateness of the technology

acquired Llnd the developing country's need to adapt it to local economic and

social conditions.

The Second Chapter concentrates on the seve rai legal and commercial

agreements for the transfer of technology. This chapter evaluates the role of

these agreements as vehic1es for the transfer of technology ta developing

countries, in terms of their contribution to the generation of indigenous

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technologlcal capabilities and employment, and thdr effects on the halance of

payments. Th., chapter dh:russes in detail the restrictive practices frequently

included in such agreements.

IV

The last chapter is a case study of the transfer of technolob'Y legislations of

Mexico and of the Andean Common Market. It identifies the principles

underlying these countries' policies towards foreign investment in general and

technology transfer in particular. The chapter descrihes the practical prohlems

encountereJ in ~he implementation and applicatiml of these legislations, as weil as

the international business community general response towards their enactmenl.

Finally, it assesses the effects of these legislations on the flow of technolob'Y to

Mexico and the Andean region.

This the sis supports the need for the generatioll of indigenous technolob'Y

as the basis of developing countries' economic and social progress and towards

technological self-reliance. To reach such a stage, developing countries must he

able to acquire foreign technology under fê.1;r and equitable terms. The enactment

of technology transfer legislation has become a means ta strengthen the hargaining

position of the tedmology acquirer -whether it is an enter prise or a developing

country itself- vis à vis the technology supplier.

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FIRST CHAPTER

TRANSFER OF TECHNOLOGY TO DEVELOPING COUNTRIES

The first section of this study will focus on the relation between technology

transfer and the pro cess of economic and industrial development. ft attempts to

identify the factors which contribute to the persistent technological dependence of

developing countries on technology developed in and imported from industrialized

countries. Special attention is given to the obstacles encountered by developing

countries in the field of transfer of technology: their limited access to appropriate

technology; the direct and indirect costs of the technology transferred; as weIl as

to the so-called "restrictive practices" frequently introduced in technology transfer

transactions. The chapter begins wj:.h a general analysis of the concf'!pts

"technology" and "transfer af technology", bath from a technical-scientific

perspective, and from a socio-economic one, with special emphasis on the

viewpoint of developing countries.

1. GENERAL ASPECTS

A. CONCEn'S

1. Technology

The concept "technology" is open to severa] meanings, ranging from those

which focus on its purely technical-scientific aspects to those with 1 predominantly

socio-economic or even cultural perspective. 1

In a very broad sense, technolagy is "the means and capacity ta perform a

These approaches are also referred to as the technicist and humanist perspectives to the understanding of technology. The technicist definition of technology explains it solely in terms of its technical aspects, while the humanist definition relates it to societal needs. See Yankey, International Patents and Technology Transfer ta Less Developed Countries, (Aldershot: Gower Publishing Co., 1987), at 1.

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particular activityll2, or the IIskills, knowledge, and procedures for making, using,

and doing useful thingsll.3 These definitions are, however, too general since they

embrace almost every sort of human activity whlch results in a benefll to society.

2

In a narrow, technical context, technolof,'Y may be defmed as the "scientific,

engineering, and managerial knowledge which makes possible the conception,

design, development, production and distribution of gonds and servicesll .4

Without any further qualification, this technical definition of "technolof,ry" is stlll

too vague. One of the main reasons for this is that technology does not usually

present itself as an isolated item, but as part of a "technol0f,'Y package". Thus, a

typical or standard transfer (lf technology transaction usually mc1udes: illlallgihle

assets: e.g. design and engineering plans, systems analysis, feasibllity reports,

trademarks, patents; tangible assets: capital goods, machinery, equipment, ami,

human assets such as skills and know-how at aIl levels of a technical, managerial

or organizational nature.5 Taking into account this "bundled" character of

2 M. Blakeney, Legal Aspects of the Transfer of Technology to Developing Countries, (Oxford: ESC Publishing Ltd., 1989) at 1

3 International Encyclopedia of the Social Sciences, McMillan Co. & The Free Press, (eds.), Vol. 15 at 576.

4 Ibid.

5 O. Hassan, "Major Issues Conceming Technology and the Development Process of Developing Countries ll

, in Technology Policies for Development and Selected Issues for Action, UNCfAD, 1988, xxix, 264p., United Nations, [Document] UNCfAD TT 94 at 19.

In arder to facilitate the understanding of the term, from a technical perspective, sorne categories or classifications have been developed. Among the~e the most common are: Core Technology and Peripheral technology: the former is that which is indispensable ta a process or the use of a product or performance of a service, and relates directly ta the firm's principal business, as opposed to peripheral technoiob'Y which is complementary to the firm's main activity. Embodied and Disembodied Technology: Depending if technology takes a tangible or intangible form. Embodied technology also called "hard goods", takes the form of

technoJogy the World Intellectual Property Organization (WIPO) has developed

the following comprehensive definition:

Technology means systematic knowledg~ for the manufacture of a product, the application of a process or the rendering of a service, whether that knowledge be reflected in an invention, an industrial design, a utility model, or a new plant variety, or in technical information or skills, or in the services and assistance provided by experts for the design, installation, operation or maintenance of an industrial plant or for the management of an industrial or commercial enterprise or its activities.6

3

Ti,is definitional approach emphasizes the raIe of technology in a purely

commercial or indus trial context, but it completely disregards the important role of

technology in the satisfa~!!on of the "socio-cultural" or "humanistic" needs of a

gÎven society, whether these needs are those of the supplier or the acquirer.

From a "humanistic" perspective, technology is conceived as "a set of

instruments or tools, materials, know-how and abilities which are used to satisfy

the community needs and to increase its rr'lntrol over the, environment".1 The

supporters of this definitional approach prefer it o\ler the technicist one basically

capital equipment, intermediate goods and final goods, white disembodied technology or "soft goods" presents itself as written documents, computerized packages, oral transmissions inter alia. Proprielary and NOIl-proprielary lechnology: The former is protected by patent secrecy, trademark or copyright, that is, it belongs exc!usively to a person or organization, whiIe the latter is legally within the public domain. See R. Robinson, The International Transfer of Technology: Them:!. Issues and Practice, (Cambridge: Ballinger Publishers, 1988) at 5 et seq.

6 WIPO, Licensing Guide for Developing COUlltries, Geneva, 1977 at 28.

7 A. Herrera, "La Creacion TecnoLOgica como Expresion de Cultura", (1973). Cited in H. Perlmutter, "Perplexing Routes 10 M.N.E. Legitimacy: Codes of Conduct for Tee/mology Transfer', Stanf. J. Int'I St. (1976), Vol XI, Number X at 197.

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because it abandons the erroneous perception of technology conceived in terms of

machines and other tangible assets -portrayed by the technicist approach- and

embraces the concept of human goals or needs, therefore relating technology to

the transformation of objects for the benefit of mankind.8

The social and cultural dimension of technology is recognized by the

OECD in a 1981 study. According to this document, technology involves,

"the use of 3cientific knowledge by a given society at a given moment to resolve concrete problems facing its development, drawing mainly at the means at its disposai, in accordance with its culture and scale of values".9

The humanistic or socio-cultural approach provides a dynamic conception

of technology by linking it to the stage of deve]opment and cultural context of the

society in which it is applied. Moreover, it outlines the notion of

"appropriateness" or "suitability" of the techno]ogy to be transferred, which, as we

will see in following pages, is a major concern for developing countries.

Developing countries' conception of "technology" coïncides with the socio

cultural dimension of technology. Technology plays a crucial role in the

satisfaction of primary economic, social and developmental needs of developing

countries. At the same time, since these countries are predominantly technology

acquirers, technology has an unquestionable impact on their consumption patterns

and cultural values. Any understanding of this term should not overlook the fact

that technology is a dynamic concept, a vehic1e for progress which constantly and

permanently improves the quality of life in developed and underdeveloped

societies.

2. Transfer of Technology

8 Yankey, supra, note 1 at 3

9 OECD, North-South Technology Transfer: The Adjustments Ahead, 1981. Cited in supra, note 2 at 2.

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4.

The growing desire of nations -in both advanced and developing countries

to attain higher Jevels of industrialization and econornic and social well-being has

led them to take part in the process of tec.hnology transfer.

5

ln general terms, transfer of technology is defined as "the utilization of an

existing technique in an instance where it bas not been pn..viously used",10 or,

similarly, as "the application of technology to a new use or user".l1 In more

explicit terms, the UNCf AD Draft Code of Conduct on Transfer of Technology

defines the transfer of technolfJgy as the "[T]ransfer of systematic knowledge for

the manufacture of a product, br the application of a pro cess or for the rendering

of a service ... ".12 According to these definitions, technology transfer occurs

when technology developed in one context is applÎl~d in another, that is, destined

for a new or modified use or to a new recipient, or a combination of both.

These definitions present only the domestic or inward facet of technology

transfer. There is still an i'lterboundaries or international si de. to technology

transfer. In its prevailing conception, technology transfer comprises transactions in

which the supplier and recipient belong to different countries. Following this

jnternational dimen!tion, technology transfer can be defined as "the introduction

into a country of technologies which exist elsewhere but not yet in that

country". 13

10 Yankey, supra, note 1 at 43.

11 Ibid.

12 D. Thompson, "The UNCTAD Code on TransferofTechnology", 16 JWTL, 1982 at 340.

13 Yankey, supra, note 1 at 43. It has been agreed that the United Nations' Code on Transfer of Technology (actuallya draft) shaH apply to international transfer of technology which takes place when technology is transferred across national boundaries between the supplying party and acquiring parties. The Code will not apply to parties temporarily located in the technology acquiring country, nor to affiliates or subsidiaries in the recipient country.

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Although appropria te, the se definitions fail to capture the major objective

of the transfer of technology process, which is the fulfilment of a society's nt:~eds.

For a transfer of technology to be successfui and wotthwhile it must be capable of

satisfying the acquirer's needs on a comilluing basis. 14 Following Yankey's

proposaI, the technology transfer process should be conceived as the acquisition of

technology which is "not only capable of meeting the needs of the recipient, but

equally capable of imparting the necessary knowledge and skills for the continuai

satisfaction of these needs".15

It must be borne in mind, that amongst industrialized countries the

technological flow is reciprocal; these countries are suppliers as weil as acquirers

of technology. Their objective, when engaging in technological transfer, is (Q cover

certain specifie gaps in their technologicai knowledge, since, for the most part,

recipient enterprises in developed countries aiready have an established

technological base,16

Developing countries on the other han d, are inherently, technology

acquirers. The technological flow between industrialized countries and the third

world is one way; that is, it do es not entail an exchange of technological

knowledge. In UNCfAD's view,17 the flow of technology from advanced to

developing countries, involves the transfer of those elements of technical

knowledge " ... which are characteristically in very short supply (and often iolally

absent) in the developing countries.,,18

14 Yankey, supra, note 1 at 43 (emphasis added)

15 Ibid at 44

16 UNIDO, IIGuidelines for the Acquisition of Foreign Technology in Developing Countries", 1973, United Nations, Document ID/98 at 2.

17 UNCf AD, "The Channels and Mechanisms for Transfer of Technology from developed 10 developing countries", Study by Charles Cooper, 1971, United Nations, Document UNCfAD TD/B/AC.11/5.

18 Ibid at 6. (emphasis added)

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Developing nations tend to attribute their problems of backwardness and

p"verty to their inability either to develop or to acquire technology. In the face of

this lack of technological knowledge and infrastructures, the transfer of technology

has become "the panacea for the economic ills of many developing countries".19

Latin America';, industrialization, for example, has been characterized by

the predominant role played by foreign technology as the basis for the

establishment of new industries and the substitution of previously imported

products.20 Between the decades of the 40's and 60's the acquisition of foreign

technology and capital was blindly acccpted as the solution to Latin America's

economic and social stagnation.

Nowadays, the final objective of developing cC"mtries, as reflected in most

of the transfer of technology legislations enacted in the past two decades, is not

Ble tempùrary satisfaction of social or economic needs through the continuous

importation of technology, but the generation and strengthening of their own

national technological capabilities.21 In the long run, these countries aspire to

continue th~;r future development on the basis of self-reliance.

19 A. Y ousef, "The Role of Transfer of Technology in the Pursuance of Technical Progress", in Technology Policies for Development and Selected Issues for Action, supra, note 5 at 4

20 C. Correa, "Transler of Technology in Latin America: A Decade of Controf', 15 JWfL, 1981, pp. 388-409 at 388.

This study reveals that "the region as a whole is probably the most important acquirer of foreign technologies through contractual channels in the third world. The share of Latin America in payments made to V.S. based firms for royalties and fees in 1978 amounted to 43 per cent of aIl payments originating in that year from developing countries". Ibid.

21 ECOSOC (United Nations Economic and Social Councii), "Reports on the Impact of Multinational Corporations on the Development Process and on International Relations", June 14, 1974, Document E/5500. Reproduced in 13 I.L.M. 791 (1974).

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II. DEVELOPING COUNTRIES' MAIN CONCERNS REGARDING THE

TRANSFER OF TECHNOLOGY PROCESS

A 1988 study by UNCf AD in collaboration with the Islamic DcveIormcnt

Bank22 emphasized that the technology needed in developing countries should

be transferred under the bf"st terms and conditions sa as to allow these countries

to maximize its impact on their development process.23 In Iight of these

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premises, developing countries have identified the fields in which they most

encounter obstacles in their acquisition of technolo!,'Y from industrialized countries.

The are as of major concern can be reduced to five leading aspects:

A. technological dependence

B. the appropriateness of the technology transferred

C. the cost of the technology

D. the need ta develop indigenous technological capacity

E. restrictive practices

A. TECHNOLOGICAL DEPENDENCE

The relation between technology and development -whkh is of crucial

interest for developing countries- has been emphasized in the past decades.

Today's economists recognize the existence of a high correlation between

industrialization and economic development as weil as the central role of

technology in the industrialization process.24 Therefore, from the standpoint of

developing countries, the tl'ansfer of technology and the process of economic and

social development are notions that have become intrinsically linked, to the point

that technology transfer is considered by many a "prerequisite, even an imperative,

22 UNCf AD, supra, note 5.

23 Omer, supra, note 26 at 29.

24 Perlmutter, supra, note 7 at 177

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for desirable economic and social development",zs

The supporters of this view beIieve that developing countries are capable of

pursuing rapid technological progress by taking advantage of technology already

developed by the more indu~trialized countries, without having to go through aIl

the costly and long-termed evolutionary process of scientit1c research,

development, adaptation and eventual commercialization of such technology.26

Furthermore, it has been stated ,'hat "massive technological dependency is indeed

the most direct (and least costly) way for backward countries to 'catch up' Wlth the

North".27 The "miracle of Japan" is often referred ta as the best example of a

country which acquired an admirable degree of technological independence after a

long period of dependence on western technology, greatly apparent in the 1950's

and 1960's.

The opposite view, the so-called IIdependence" theory, maintains that

developing countries are getting poorer, despite their efforts to attract the

accurnulated techn010gy of the industrialized countries.28 Owing to their lack of

scientific and manage rial skills to generate indigenous technology developing

countries have become almost totally de pende nt on foreign technology.

The problernatic of the technological dependence has been recognized by

scholars and international institutions such as UNIDO which has categorically

asserted that "nowhere are the disparities between the industrialized and the Third

World more marked than in the crucial field of technological development; the

dependence is almost total".29

25 Blakeney, ~upra, note 2 at 57

26 Yousef, supra, note 19 at 4

27 Ibid at 6

28 Ibid at 4.

29 UNIDO, "TecJlIlological Self-Re/iance of the Developing Countries: Towards Operational Strategies", Development and Transfcr of Technology Series, No. 15, 1983,

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In UNCf AD's opinion, technological dependence is the result of an

attempt to industrialize on the base of a pre-existent economic structure "which is

incapable of generating the skills required ta originate, introduce or operate the

technologies required to meet growing consumer demands".30 The scenario

resembles a vicious cycle: the need to attain better living standards through the

implementation of development programs linked to the scarcity of scientific,

technical and managerial skills has lead developing countries to the continuous

importation or transfer of technology from abroad. In the long run, this has

resulted in the absence of indigenous R&D and in the current state of

dependence on foreign sources of tech .. lOlogy.

The process of technological change has not been generated similarly in the

industrialized countries and the developing ones. According to UNCf AD,

technological changes in most advanced countries "have been generated

endogenously for the most part, and when imported, technology has been rapidly

absorbed and adapted into an internaI process of technological innovation".31 In

developing countries, industrialization is an exogenous factor; it has been a

"response to domestic demands for consumer goods which were previously

imported from advanced countries".32

Traditionally, the role of developing countries in the context of

international economic relations, has been that of producers and suppliers uf

tropical food s, mineraIs and agricultural raw mate rials with little or no do mes tic

United Nations Document ID/262 at 3. In addressing the question of technological dependence this study by UNIOO

shows that developing countries account only for 12.6% of global stocks of scientists and engineers in R&O; 2.9% of global expenditures on R&O, and 3.3% of global exports of machinery and transport equipment.

30 UNCf AD, supra, note 17 at 6

31 Ibid at 4

32 Ibid at 5

11

manufacturing industries. Several authors have attributed this situation to the

Third World's experience with colonialism.33 The home country promoted the

cultivation of crops and exploitation of mineraIs required for the satisfaction of its

own economic needs. Therefore, while the colonies were concentrating on the

production of raw material~ and foodstuffs, the home country was able to deve10p

manufacturing industries and introduce those manufactured goods to the

colonies.34 The supporters of this view argue that colonialism led to the foreign

control of the economies of the developing countries and made them

complementary to the home country's economy.

Since the post-colonial period, developing countries have directed a11 their

efforts towards achieving higher economic standards. It has become imperative to

expand their economic activity focusing not only on the production of raw

mate rials but also on the manufacturing and industrial sectors.

Notwithstanding the disparities amongst devcloping countries -which run

from Jeast developcd countries to newly industriaJizing countries-, there are severa)

common characteristics that influence their participation in the process of transfer

of technology. The main probJem is lack of economic resources necessary to

generate domestic technical knowledge:: and managerial skiJJs. Developing

countries suffer "double dependence", as UNIDO recognizes, in the sense that

they not only need ta acquire the elements of technical knowledge but also need

to import the capacity ta use this knowledge in investment :md production.35

Another common characteristic in developing countries is the scarcity of qualified

manpower, to undertake the application and adaptation of technologies that

require a certain degree of specialization. Furthermore, the continuous ''brain

drain" of unempJoyed and underempJoyed professionals and scientists, contributes

33 See Yankey, supra, note 1 at 39.

34 Ibid

35 UNIDO, supra, note 29 at 4

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to and aggrava tes the problem hindering the emergence of indigenous technology.

As to the cost of technological dependence involved in the transfer of

technology ta developing countries, UNIDO reveals that it could be as h1gh as $30

to $50 billion a year "if allowance is made for the transfer of inapproIJriate

technologies and the long-term influence of technologies that undermine the

development of endogenous capabilities".36

B. APPROPRIATENESS OF TECHNOLOGY

There is a strong tendency to link the aspect of the appropriateness of

technology solely with the problem of unemployment. Developing countries for

the most part require labor-intensive technologies for two basic reasons: high

unempJoyment and relatively cheap labor costs. These countries argue that the

technologies which have been imported into their markets, "have had a strong

labor-saving bias, appropriate to relative factor endowments and prices in the

advanced countries, but inappropriate for developing countries".37 As asserted

by a CED study, the utilization of capital intensive technologies, could intensify the

problem of unemployment and th us aggravate the already existent inequalities in

the distribution of income.38 Furthermore, the balance of payments problems

faced by aimost aIl of these countries would be aggravated as weil by the excessive

importation of capital equipment.39

The availability of low-wage labor might be considered as a two-edge sword

36 Ibid at 5. UNIDO's study is alluding to the use of capital-intensive rather than labor-intensive technology and ta the indirect and hidden costs of the technology transfer process. These aspects will be studied in detail in Sections B, C and D of this Chapter.

37 UNCfAD, supra, note 17 at 61

38 CED (Committee for Economie Development), "Transnational Corporations and Developing Countries: New Policies for a Changing World Economy", New York, 1981.

39 Ibid at 53

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by transnational corporations. CED affirms that because of the low levels of skills

and producth'ity in deveJoping countries, cheap Jabor may be expensive ta use in

production. Companies, therefore, resort ta more capital-intensive processes in

arder to reduce costs and ta ensure quality and uniformity of the products.4O

Although the choice between capital or labor intensive technologies is a

crucial one, this is not the only fact worth considering. As a study by UNID041

points out, three sets of factors should be taken in ta account in determining

whether a technology is appropriate from the perspective of the acquirer country.

These are: development goals, rcsource endowments and conditions of application.

Development goals can include growth of employment and output through

more effective use of local resources; formation of skilIs; equality in income

distribution; promotion of technological self-reliance; improvement of the quality

of life in genera1.42

Resource endowments include factors su ch as: availability and costs of local

Jabor, as weIl as their Jevel of skil1s and managerial capacity; cost and availability

of natural resources, etc.43

Conditions of application refer ta a number of economic and non-economÏC

factors, such as the level of infrastructure, climate, natural environment, social

structure, traditions and cultural background of the population, size of the marI <et,

fareign exchange reguiations, etc.44

Developing countries have also raised the point that frequently the

technology transferred contains high degree of sophistication and elaboration th us

being incapable of meeting the needs of most of the people in poor countries. As

40 CED, supra, note 38 at 52.

41 UNIDO, supra, note 29 at 14 et seq.

42 Ibid

43 Ibid


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acknowledged by Blakeney, consumer goods from developed countries n ly offer

the satisfaction of entirely different needs to those which are crucial in developing

countries. Blakeney adds the potentially negative role that advertising and hrand

promotion of consumer goods might play in developing countries. In this author's

opinion this leads to the creation of the sa me sort of consumer demands as those

in developed countries, "with the addition al appeal of a vicanous association with

the lifestyle of developed countries".45

The adaptation of the technologies transferred to local conditions is nt vItal

necessity for developing countries if it is to contribute effectively to the

achievement of their t:"conomic and social objectives. Given the relative smallness

of developing countrie~,' markets, the suppliers of technology, - TNCs for the mnst

part -, may be reluctant to assume the additional costs entailed hy the adaptation

process. As expressed in a study conducted by UNef AD, the desirahility of

technological adaptation from the standpoint of the supplier will mainly depend

on the "opportunity cost of using highly skilled technicians dnd research and

development staff ta adapt an existing technology".46 The technology suppliers

nearly always consider it more profitable to use scientific and technical personnel

in the development of new technologies and products for the large markets in

industrialized countries, rather than adapting existing technologies for small

markets in developing countries.47

Adaptatior takes place. ta sorne extent, in the field of consumer goods, in

order to reflect variations in taste, customs and climatic conditions and to take

advantage of available raw materials in the host country. Adaptations in the

automotive and heavy machinery industry are less frequent. since manufactllrers in

this area produce standardized equipment to facilitate interchangeability of parts

45 Blakeney, supra, note 2 at 65.


47 Ibid

15

worldwide.48 Thi~ affects directly the agricultural sector. The same can be âaid

about the pharmaceutical industry where companies have to maintain high quality

standards and effectiveness, leaving as these companies argue, little room for

adaptation.

C. COST OF THE TECHNOLOGY

Although not always easily quantifiable, technology is a productive asset

with a commercial value;49 a commodity which is constantly generated, applied,

bought and sold.

Transfer costs can be classified as direct costs and indirect costs. Direct

costs include charges for the licensing of patents, trademarks and know-how

(royalties, licensing fees) and fees for the supplying of technical information and

training.50 A 1980 UNCf AD study reveals that developing countries disburse in

direct payments for the use of patents, process know-how, trademarks and

technical services annually about $10 billion.51

Indirect costs are more difficult to identify, but as UNIDû affirms, they are

held to be many times higher than direct costs.52 Indirect costs may take the


49 Perlrnutter, supra, note 7 at 19


51 UNcr AD, "Formulation of a strategy for the technological transformation of developing cou11lries", 1980, United Nations, Document TD/B/779 at 2. Direct payments (royalties and license fees) from developing countries to United States companies amounted in 1977 only to 8.1 per cent out of a total of $2,193 million. Although these payrnents represent a small percentage, they constitute a significant economic burden given developing countries' limited economic resources. See Blakeney, supra, note 2 at 61.

52 UNIDO, supra, note 29 at 5. This sarne study shows that indirect and hidden costs could be ranging from US$ 6 billion to US$ 12 billion a year, equivalent ta 2 to 4 per cent of the national incarne of developing countries. Ibid.

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form of over-pricing of imports of intermediate goods and equipment sorne of

which may not have a market price;53 priee mark-ups; charges through profits

on capitalization of know-how;54 and charges through part of the repatriated

profits of wholly owned subsidiaries.

16

The cast of technology is one of the most controversial aspects of the

relation between transnational corporations and developing countries. These

nations' main complaint is that they are charged higher priees for the technoloh'Y

than advanced countries. Moreover, since in their view technology is part of the

common heritage of mankind, they argue that Iike any other form of knowledge

that lies in the public domain, technology should be freely obtained.55 This

extreme view is opposed by advanced countries and transnational corporations by

asserting that technology producers should be able to reeover the eost of their R

& D and yield an economic return like in any other investment.

Several factors influence the cost of technology transfers. In general terms,

the recipient country's resource endowments, whether these are skilled manpower,

availability of necessary inputs (raw materials, energy, component parts, etc.) at


54 Capitalization of know-how is the conversion of know-how fees intn equity holdings. As UNIDO states, from the licensee's perspective, such a capitalizatio(J guarantees the continuing interest of the supplier during the penod of the agI eement and even after. For the licensor, it gives him a finhncial stake in the proJect wlth prospects of capital appreciation over time and increased dividends receipts as the project expands. However, the same study asserts that from the developing eountrics viewpoint it may be desirable to limit capitalization to a certain proportion of the equity capitul, since capitalization involves a permanent financial interest of the foreign licensor in the local enterprise. UNIDO, supra, note 16 at 18.

55 CED, supra, note 38 at 53. A study by ECOSOC asserts that "[D]eveloping countries argue that the

technology provided by multinatic,nal corporations has already been produced and that the corporations have aIready derived ample reward from its use in the developed countries for which it was primarily intended. Hence, the transfer to the developing countries does not entai! any significant extra cast". See supra, note 21 at 847.

17

reasanable cost and quality, or a favorable geographical position, are factors that

influence the cost of technology transfer by making it fluctuate at lower levels.

The lack of these elements may result in higher costs, since the supplying

enterprise IImu'it internalize sorne or an of these costs via in-plant training, vertical

integration, relocation ... 11•56

It is argued that the cost of technology is determined by the relative

bargaining power of the parties, and that the crucial variable is the "relative

ignorance" of the recipient company. 57 Very often, the acquirer in a developing

country is not aware of the existence of alternative sources of technology nor is

he/she aware of the nature of the technology he/she is bargaining for. 58 The

supplier who by virtue of the technology he is offering has a quasi-monopalistic

advantage, is then able to inflate the costs of the technology offered to levels

much higher than those incurred by him in acquiring and transferring it to the

recipient. 59

Another factor that bears directIy on the cast of technology is that a great

deal 'lf it i~ transferred in packages, that is, in the form of ''bundled technalogy".

The recipient is required lO pay not only for the requested technology but also for

items not listed as part of the bargain, such as marketing guidance, related

technical know-how, technical assistance, raw materials or spare parts that

probably could be obtained in the domestic market ~ 10wer priees.

It should also be considered, that technology suppliers in many cases hold a

monapolistic or quasi-monopolistic advantage owing to the protection of patents

and trademarks. As mentioned eartier in this Chapter, this leaves the acquirer

56 R. Robinson, The International Transfer of Technology: Themy. Issues and Practice, (Cambridge: Ballinger Publishers, 1988) at 68.


58 Ibid at 56

59 Ibid

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with !ittle option regarding alternative suppliers and consequently, with \iule roum

for negotiations in which to obtain a better priee for the technology.

The situation gets even more complex if we take into account that most of

the technology transferred to developing countries is conveyed by a TNC through

wholly-owned subsidiaries established in the developing country. In this

framework, the parent company has greater freedom to use a method of

accounting that minimizes tax burdens and facilitates the repatriation of payments.

In the context of trademarks Iicensing, the parent corporation frequently tends to

disguise profit remittances as excessive royalty oayments for the use of its Iicense

by the subsidiary. As recognized by UNIDO, "the potential for such manipulation

appears likely to increase as a result of the continued concentration of economic

power in the hands of transnationals and the increasing importance of intra

corporate transactions in their total trade".60

As it will be se en in the Third Chapter, sorne Latin American legislations

on technology transfer have attempted to deal with this problem by placing Iimits

on profit rernittances of TNCs and even by prohibiting altogether the payment of

royalties or fees between parent and subsidiaries.

Another way to reduce technology transfer costs is by requiring the

unpackaging of technology. This practice is being prornoted by developing

countries' governments, specially in the Andean Corn mon Market, wishing ta

replace sorne of the cornponents of the "packages" by locally manufactured inputs

and raw materials as a way to support national industries and to encourage the

development of indigenous technology.

D. DEVELOPMENT OF INDIGENOUS TECHNOLOGY

The prirnary objective of developing cou nt ries is not only the rnere

60 UNIDO, supra, note 29 at 7. Although transfer pncmg is a problem confronted by both industrialized and developing countries, transnational corporations are more induced to resort to this practice in developing countries due to frequent governmental restrictions on irnports, dividend rernittances and royalty payrnents, etc.

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acquisition of appropriate technology, but also: and perhaps more importantly, the

deveJopment of indigenous technologicaJ capabilities through the technology

acquired as a way out of the deeply rooted technological dependence and towards

self-reliance. UNIDO affirms that technological self-reliance must be understood

in terms of "the capacity to identify national technological needs and apply bD th

foreign and domestic technology under conditions that enhance the growth of

national technological capability',.61

In order to reach this stage, developing countries should concentra te, as

suggested by Yankey, in the acquisition of "generative technology" which not only

involves the utilization of the technology transferred to satisfy human needs, but

more importantly has the potentiaI for further generation of technology, through a

process of "learning by doing".62 This would enable acquiring enterprises to

develop skills to solve new and more complex technologicaI problems, and would

promote as weil the creation of local centers for research and development.

The utilization of loca) technological potential, although being an essential

pre-requisite towards further development of indigenous technology, could be a

two-edge sword, in the sense that it may entail further costs for the acquiring

enterprise. As UNCf AD as sert s, owing to possible inexperience and\or ignorance

on the part of the lo.:al technicians and managers regarding the technique to be

applied, it could take much longer to bring a project to the point of full

production or it might operate ';-:;s efficiently due to deficiencies in the design.63


62 Yankey, supra, note 1 at 45. Generative technology is opposed to "consumptive technology", which does not have any real potential for generating any further technology. Ibid

This process is also known as "absorption" of technology since it entails "the inducement of technical progress on the basis of transferred technology". B. Hansen, "Economie Aspects of Technological Transfer 10 Developing Countries", Il International Review of IndustriaJ Property and Copyright Law, 1980,429 at 431

63 UNCf AD, "Guidelines for the study of the Transfer of Technology to Developing Countries", 1972, United Nations, Document TD/B/AC.ll/9 at 16

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These problems are translated into lost profits and/or higher production costs to

the receiving enter prise which might r~ avoided if the supplying enterprise were to

undertake the whole project through a highly packaged transfer.

UNCf AD has recognized that the technological dependence is being

perpetuated by certain methods for the transfer of technology that tend tn "hy

pass" the existing local technological potential.64 The development of

indigenous capabilities is being hindered, among other factors, by the existing

patents and trademarks systems, which "are increasingly being used by inventors

not only ta ward off competition but equally important to black any potential

indigenous intruders in their respective fields".65 The role played by the patent

and trademark systems in the transfer of technology to developing countries will

be studied in the next chapter in greater detai!. Suffice ta say, that although it

was basically conceived ta stimulate the development of indigenous technology,

this goal has not been effectively met in practice. The inclusion of restrictive

practices in technology transfer agreements is another factor that negatively

influences the ability of developing countries to generate indigenous technolo!,'Y.

It must be recognized, however, that the development of local skills is being

hindered not only 'by the foreign supplier's actions, but abo by acquirers in

developing countries who favor the acquisition of packaged technology. WhiJe this

behavior could originate in a genuine technical and economic inferiority of the

local techniques it cou Id also reflect the latter's interest in having access tn a

brand-name or trademark representing the technology. The acquirer is then able

ta secure the economic advantages of such captive market.66

Although there is no solution ta this dilemma, UNCf AD suggests that it is

necessary to measure the short-run lasses owing ta inexperience and inefficiency,



66 UNCf AD, supra, not.'! 63 at 18

21

against the long-run s~vings to the economy through the generation of local

technological capabilities and the reduction of foreign exchange outlays involved in

the importation of foreign technoIogy.67

E. RESTRICTIVE PRACTICES

Transnational corporations are a major source of technology, being

responsible for approximately 80% to 90% of the technology transferred to

devdoping countries.68 TNCs are directIy linked to the existence and

permanence of restrictive practices and therefore their role in the context of

technology transfer ta developing co' 'Jltries has been subject to serious and

constant scrutiny.

Restrictive business practices are regarded as attempts by firms to restrain

competition, limit access to markets, or foster monopolistic contro1.69 The

inequality of bargaining powers between technology suppliers and acquirers

accounts to a great extent for the existence of these practices.

The points of view of industrialized countries (and TNCs) and developing

countries in this area are quite opposed.70 In the group of industrialized

countries the regulation of restrictive practices has taken place in the context of

antitrust laws, aimed at avoiding restraints on competition.71 Therefore, these

countries insist that restrictive practices should be condemned ooly when they are

67

68

UNCTAD, supra, note 63 at 18

UNIDO~ supra, note 29 at 5

69 F. ~ng, Restrictive Business Practices, Transnational Corporations and Development, (Boston: Martinus Nijhoff, 1981), xv, 166p., at 1.

70 This is evidenced by the considerable number of obstacles eocountered in the drafting process of the proposed United Nations' Code of Conduct on Transfer of Technology. Chapter 4 dealing with Restrictive Practices, remains to be the "stumbling block" of the negotiation.

71 Blakeney, supra, note 2 at 142

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unreasonable or unjustifiable under the particular circumstances.72

From the perspective of developing countries, the se practices negate the

opportunity for attaining the whole developmental benefits that should derive

from the transfer process. Their overall effect, i5 that they "prevent the growth of

indigenous technology ... and serve to perpetuate the technological dependence of

developing countries on the industrialized parts of the world".73

A very large number of restrictive business practices have been identified

in relation to the transfer of technology to developing countries through TNCs.74

1. Export Restrictions

Export limitation clauses are among the most frequently included terms in

transfer of technology agreement~. Export restrictions can take the form of

absolute restrictions (global bans on exports) whereby the sale of goods

72 K. Yelpaala et al, (eds), Licensing Agreements: Patents, Know-How, Trade Secrets and Software, (Boston: Kluwer, 1988), xviii, 423 pp. at 266.

This so-called rule of reason - an Anglo-american approach - recognizes that it is impossible to elaborate any specific set of detailed anti-trust prohibitions ",vhkh could be effectively applied in ail circumstances. Under the antitrust legislation in the United States the person or firm whose conduct is challenged is afforded in most situations the opportunity ta show that the practice or ~ontractual restriction in question is "reasonable" in view of business conditions and does not substantially impair competition. However, a few type of agreements and pra<:tices are categorically presumed to be unreasonable and therefore Illegal without elaborate inquiry as ta the precise harm they have caused or the business excuse for their use. UNCf AD, "Control of Restrictive practices in trallSfer of techn%gy traflsaclÏollS", 1982, United Nations, Document TDfB/C.6172, footnote 10 at 2.

73 Thompson, supra, note 12 at 312

74 The Draft Code on TOT lists 20 practices, fourteen of which are the subject of substantial agreeme!H, white the remaining six are only supported by the Group of 77 and Group D (USSR and Eastern Bloc Countries). In the present study we will primarily confine ourselves to this list. For a more extensive list of restrictive practices, see Long, supra, note 83 at 78. It must be noted that the regulation of restrictive practices varies from one legislation ta another. Therefore, we are providing general rules and the most widespread exceptions to these rules.

,

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manufactured with the technology supplied is restricted to the country or territory

of the acquirer; 75 or Ilon-absolute restrictions which incIude restrictions on

exports to certain markets, or permission to export only to certain markets

designated by the supplier or obligation to obtain the supplier's prior approval

before exporting.76 Additionally, export restrictions can be incJuded as higher

royalties for exported products.77

Export restrÏï.tions have the effect of maintaining production and sales

levels at a minimum. These restrictions particularly harm developing countries

which are prevented from generating and/or furthering export-oriented capacities

required to compete in international markets.78

The balance-of-payments effects of export restrictions are easily identified:

developing countries are inhibited from eaI ning foreign exchange; at the same

time they are expected to meet their obligations towards the TNCs (royalties and

licensing fees, inter alia) in hard foreign currencies. It must be recognized,

however, that the exclusion of export restriction c1auses from technology transfer

agreements cannot guarantee higher export earnings. The acquiring country must

be able to achieve internationally competitive levels in production volume and

quality in order to succeed in the export arena.

As a general practice, recipient countries allow the inclusion of export

restrictions in technology transfer con tracts when necessary to preserve the

supplier's market and to protect him from the recipient's competition in those

geographical areas covered by the supplier's industrial property rights 79 or in


76 Ibid




•

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areas where the supplier himself is manufacturing or se1ling the patented

goods.80 Export restrictions are also allowed to proteet third parties' industrial

property rights in areas where the supplier has granted an exclusive right to use

the technology.81

2. Grant-back provisions

Through these clauses the recipient is required to transfer back to the

supplier, often for a consideration, the rights ta the use of improvements,

innovations or other new inventions developed by the acquirer in the process of

using the transferred technology.82

24

Grant back clauses may be absolute or mutual. They are absolute when

they provide for a one-way, non-reciprocal flow of technical information and

improvements from the purchaser of technology to the supplier.83 Grant back

clauses are mutual when there is a reciprocal exchange of improvements between

licensor and licensee. Reciprocity can be understood in a narrow sense, as the

exchange of technology, or in a broader sense, as an unilateral grant-back of

information against adequate r~muneration.84

Absolute grant-back clauses are prohibited by most countries, since they

deprive licensee firms of their legitimate right to improvements or inventions and

also because they often "make them worse off because of the money expended for

their undertaking".85 Often, these clauses discourage acquiring firms from




83 H. Schwamm and D. Germidis, (eds.), Codes of Conduct for Multinational Companies Issues and Positions, (Belgium: ECSIM -European Center for Study and Information on Multinational Corporations, 1977), at 18



25

undertaking the development of indigenous R & D.

Mutual grant-back clauses seem ta be more acceptable since they allow the

exchange of improvements between the parties, although the terms of the bargain

are not always equal or balanced between supplier and acquirer. As identified by

UNCT AD in the case of Spain, access ta foreign impruvements in most cases will

be under the same terms and conditions of the original contract. Therefore, the

supplier always obtains improvements free of charge; the improvements nearly

always become the industrial property of the foreign supplier which a]so retains

the right to sub-license the acquiring firm's improvements.86

3. Tying Clauses

Tying clauses are provisicJ1S which impose upon the receiving party the

obligation ta acquire additional inputs, such as raw mate rials, intermediate

products, machines or additional technoIogy, from the supplier or a source

designa~ed by him.87 Often, the acquisition of the addition al or "tied" goods is

usually a condition for obtaining the techno]ogy itself. By retaining total control

over the supply sources, the supplier is able ta charge higher prices for the

additional inputs, and th us maximize his profit margins. As UNCT AD recognizes,

overpricing of inputs constitutes a "hidden" cast of technology transfer.88 In

such circumstances, tie-in clauses contribute ta a monopolistic practice and

irlcrease the acquirer's dependence on imports of capital and intermediate goods.

The inclusion of tie-in clauses in technology transfer agreements is allowed,

however, in those cases where the purpose is ta main tain high quaHty standards of

86 UNCf AD, Major issues arising from the transfer of technology. A case study of Spain, 1974, United Nations, Document TDIB/AC.11/17 at 33.

87 UNCT AD, supra, note 72 at 36

88 UNCf AD, "Major issues arising from the Transfer of Technology to Developing Countries", United Nations, December 1975, Document TD/B/AC.l1/lO Rev.2 al 27.

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the manufactured goods and their reputation in the international market.

4. Price-tîxing

Under a priee-fixing clause, the supplier of teehnolo!,'Y holds the right to fix

the sale priees of the goods manufaetured or serviees produeed using the

teehnology supplied. The priees fixed by the supplier may be specified priees as

weIl as maximum or minimum priees. The practice may extend ta resale priees

that is, ta the priees charged ta third parties by a purehaser selling the goods

bought from the recipient.89

Clauses fixing sale or resale priees of goods prevent the aequirer from

refleeting its own production and marketing eosts, as weIl as the effects of the

forces of supply and demand on the priee of such goods.90

S. Challenges to validity

By virtue of these clauses the Iieensor forbids the licensee from eontl..!sting

or ehallenging the validity of the rigots granted under a transfer of teehnology

agreement, during the life of the agreement.91 The "no challenge" clause tries


90 Yankey, supra, note 1 at 34. Tying clauses have been linked ta eross-licensing agreements. United States'

Supreme Court has held that arrangements "between patent holders ta pool their patents and fix priees on the produets for themselves and their licensees" violate the Sherman Act. See United States v. New Wrinkle, 342 V.S. 371, 380(1951); cited in UNCI'AD, supra, note 72 at 52.

91 In the United States, clauses precluding the Iieensee from eontesting the validity of a licensed patent are deemed against publie policy and a violation of the federal patent laws, therefore unenforeeable. See Lear, [ne. v. Adkins, 395 V.S. 653 (1969), cited in UNCfAD, supra, note 101 at 21. This precedent has not been applied in the context of trademark licenses. Thus "under common law principles of contract law, a lieensee of a trademark will, during the subsistenee of the Iicense, generally be estopped to challenge the mark's validity". UNCfAD, supra, note 72 at 21.

l

ta prevent the acquirer from avoiding a bargain which he freely entered into by

contesting its validity.92 The c1ause has the effect of "safeguarding the basic

condition for payment"93 which is namely the validity of the transfer.

6. Restrictions on Research and Development (R & D)

27

Restrictions on R&D prevent the acquirer from initiating further research,

improvements or adaptation programs in connection with new products, processes

or equipments.94 In general, these clauses are very dangerous to the interests of

developing countries since they invariably obstruct the former's efforts to increase

their absorptive capacity and reduce their technological dependence.

Of ail the possible varieties of restrictions on R&D, those having more

negative effects on developing countries are probably restrictions on adaptations.

We have already mentioned the problems faced by developing countries when

acquiring inadequate technology and the importance of adapting it to local

conditions. Due ta the lack of capital most of the time these countries are not

able to undertake research for innovative purposes; rather, they are more likely ta

incur "adaptation expenses". Suppliers are more likely ta allow the acquiring

party to adapt the technology or introduce innovations in it, provided the acquirer

does not use the supplying party's name, trade or service marks, and the

adaptations do not render the technology unsuitable for the purpose for which it

was supplied.95

7. Restrictions on the use of personnel

By virtue of these clauses the acquiring party is required to permanently





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use personnel designated by the supplier. It has been gent!rally agœed that this

practice should be avoided except when necessary for the dficient transmission,

establishment and use of the technology transferred and when locally trained

personnel are not available.% In practice, most agreements accepting this

restriction do it on a temporary basis, provided the supplit!r undertakes the

training of local personnel.

8. Patent pool or cros:,;-licensing arrangements

28

In cross-licensing agreements, the parties to the agreement mutuaHy grant

licenses to each other; each party acts as both licensor and licensee.9" In patent

pooling agreements, several owners of related technology cooperate by merging

their patents and other relevant technology.98 CNCf AD admits that these

practices are not restrictive per se.99 However, since they tend to allocate

markets among strong competitors and restrict the access of weakt!r suppliers,

they are frequently included in the agreements together with other restrictive

96 Ibid


98 Ibid

99 This practice has been categorically prohibited in the Oraft Code except in tht! case of joint researeh arrangements. See, Blakeney, supra, note 2 at 148.

The Draft Code defines the se arrangements as:

Restrictions on territories, quantities, priees, customers or markets arising out of patent pool or cross-lieensing agreements or other international transfer of teehnology interchange arrangements among technology suppliers which unduly limit access to new technological developments or which would result in an abusive domination of an industry or market with adverse effects on the transfer of technology ...

Ibjd

, l

clauses such as exports restrictions with the cIear purpose of strengthening the

supplier's monopolistic control. 100

9. Payments and restrictions after expiration of industrial property

rights

29

As a general ruIe, mast countries take the position that "restrictions or

payments obligations based on an industrial property right must terminate when

the industrial property expires".I01 However, UNcrAD acknowledges that the

regulatory approach regarding restrictions and payments in connection with secret

"know-how" varies considerably. While sorne countries regard these restrictions as

unlawful only where the "know-how" has lost its secret character, other countries

prohibit any restriction once a certain period of time after the transmission of the

"know-how" has passe d, even when the "know-how" has not yet lost its secret

character.102

Developing countries seek the prohibition of clauses restricting the use of

secret "know-how", when the transfer agreement has expired or after the "know

how" has lost its confidentiality independently of the acquiring party. On the other

hand, industrialized countries consider that the restrictions should continue to be

applicable where the technology is still legally protected by intellectual or

industrial property rights or has not entered public domain.103


101 UNCfAD, supra, note 72 at 11. Sorne countries require an adjustment of payment obligations and other restrictions, if a substantial part of the patents or other technology of the ol"iginal package have expired. Ibid. The charging of royalties on patents and other industrial property rights after their expiration, cancellation or invalidation has been prohibited per se by the Draft Code on TOT.

102 Ibid


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10. Restrictions aller expiration of the arrangement

Transfer of technology agreements may impose -even after their expiration

prohibitions on competition, restrictions on R&D, and in particular the obligation

to keep the confidential character of the information obtained. UNCf AD

identifies three major trends amongst countries' legislations. 104 The flrst group

of countries considers that the holder of a patent or the ()wner of the know-how

may prohibit any unauthorized use or disclosure after termination of the

agreement, if the patent protection has not yet explred or the secret know-how

has not yet entered the public domain. Another group contemplates the

possibility that the former licensee may have a right ta continue using the know

how provided adequate consideration is given. Finally, a third group of countries

allows the former licensee ta freely use the industrial property rights or know-how

once the agreement has expired, independently of the expiration of the industrial

property rights.

n. Duration of the agreements

The general approach regarding the duration of technology transfer

agreements is that it should not exceed the period of validity of the protection

accorded ta industrial property rights. This approach however, varies from

country to country, specially between developed and developing countries. 105

While most of the legislations link the duration of the transfer of

technology agreement to the protection granted to indus trial property rights, there

are sorne other considerations to be made. Sorne Latin American countries follow

the approach that duration should not exceed the period of time necessary ta

104 See UNCfAD, supra, note 72 at 15

105 In developing countries protection of industrial property rights is 10 years average, while in developed countries it varies from 18 up to 20 years.

.. 31

absorb or assimilalc! the technologyl06 and/or to avoid its obsolescence.107

The TNCs main tain that the protection of confidentiality is of vital

necessity and that variations in the protection required de pend on the nature of

the technology.l08 The developing countries' position is that the industrial

property rights of industria1ized countries' are abused by the excessive duration of

protective periods. These are seen as exploitative and unrealistic,l09 since they

restrain possible future competition from acquirer countries as exporters of

technology.

12. Restrictions on the recipient's volume of production, field of activity

or territory

Field-of-use restrictions are found where the use of a technology is

restricted by the supplier to a specifie sector, preventing its application in other

potential fields.110

Conditions regarding the use of the technology acquired may also involve

the setting of a maximum or m.1imum production volume within a fixed period of

time. Requiring developing countries industries to reach a fixed level of

production within a pre-determ,ned period exerts unjustified strain mainly to those

industries in their early stage~ of production which are just starting to recover the

106 Although Mexico's legislation sets a maximum duration period of 10 years, the underlying criteria is whether the assimilation of the technology transferred can be accomplished in 10 years or a shorter periode

107 Argentina's legislation links the duration of technology agreements to the protection granted to industrial property rights; however, this term period "shaU not exceed the period of its foreseeable obsolescence which will be presumed to be five years unless proof to the contrary is produced". See UNCf AD, supra, note 72 at 18.

108 H. Perlmutter, supra, note 7 at 180.

109 Ibid.


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investment. On the other hand, requiring the industry to main tain production

levels under a minimum, is also unjustified since the industry is prevented to rcach

full productivity. This practice is often resorted to in order to avoid competition

from the acquirer.

It must be noted that in sorne legislations field-of-use restrIctions,

production volume restrictions and territorial restrictions are considered part of

the industrial property rights, and therefore valid. lll

13. Exclusive sales or representation agreements

These clauses limit the freedorn of the acquiring party to organize its

distribution system independently from the supplier,112 by requiring the former

to enter into sales or representation agreements exclusively with the supplier.

Again, UNCf AD distinguishes three basic approaches.113 First, there are

countries that categorically prohibit any sort of intervention of the supplier into

the distribution system of the recipient. Second, there are countries that prohibit

the se clauses when they are of an exclusive nature and finally, sorne countries

prohibit the se clauses when they serve to rnonopolize markets.

A general exception is made when the supplying party has a considerahle

market share that enables him to distribute the products more efficiently than the

acquirer.

One of the principal objectives of the transfer of technolo!,'Y legislations

enacted by developing cou nt ries and specially Latin American countries, as

pioneers in this regulatory trend, is the regulation and in sorne cases the total

111 This is the case of Argentina and Colombia. On the other hand, Brazil, Mexico and ANCOM's legislations prohibit the se clauses without any qualification. UNCfAD, supra, note 72 at 6-10.

112 Ibid at 42

113 Ibid

33

elimination of restrictive practices from the agreements. In the next chapter we

will anaJyze how these practices manifest themseJves and the negative effects they

produce in che different types of legal and commercial agreements thl'Ough which

technology is transferred. We will also assess the social, cultural and economic

effects of the se agreements in tenns of their contribution to the generation of

indigenous technological capabilities, the creation of employment sources and their

effects on deveJoping countries' balance of payments.

1 SECOND CHAPTER

METHODS FOR THE TRANSFER OF TECHNOLOGY

1. SELECTION CRITERIA

Technology may be transferred through a wide range of mechanisms.

These mechanisms make accessible to an acquiring enterprise the elements of

technical knowledge needed to set up or operate production facilities which

otherwise may be unavailable in the domestic market. 114

34

The selection of the method and conditions unrler which technology is to ht!

acquired depends on varied circumstances. Primarily, the technolo!,'Y to be

transferred should respond to the development objectives and social and economic

114 UNCTAD, supra, note 17 at 12. This study points out that bt!caust! of developing countries' lack of many elements of technical knowledge, "it is possible that the range of mechanisms which are used in transfers between advanced and developing countries is greater than in the case of intra-advanced country exchanges". Ibid

The Draft Code on Transfer of Technology provides a list of the existing methods for the transfer of technology:

- the assignment, sale and licensing of ail forms of industrial property (except trade marks when not part of transfer of technology transactions);

- the provision of know-how and technical expertise in the forms of plans, models, instructions, specifications etc. involving technical advisory and managerial personnel, and also personnel training;

- technological knowledge necessary for the installation and functioning of plant, equipment and turnkey projects;

- technological knowledge necessary for the installation and use of machinery etc. obtained by purchase or other means;

- the technological contents of indus trial and technical co-operation agreements.

35

necessities of the acquiring country.

Foreign exchange shortages are an almost chronic feature in deveJoping

countries. Accordingly, the most suitable methods for these countries are those

that minimize foreign exchange outlays, such as joint ventures, which entail foreign

equity participation in the acquiring enterprise.115

From a technical point of view, the complexity of the proposed project will

have direct bearing on the selection process and, especially, on the degree of

sophistication of the technology to be acquired. Where the objective is to

establish a manufacturing plant or to build a hydroelectric plant, the acquirer

could choose a turnkey project in any of its variations. Through this method, the

supplier provides a complex technological package which may incIude everything

from feasibility studies to the setting up of the plant. If the acquirer requires very

specifie technology (e.g. machinery, spare parts) the choice will probably be a

mere purchase or a lieense.

The technoJogical and financial capacity of the recipient is a factor closely

related to the complexity of the technology and will as weil influence the selection

process. An inexperienced acquirer will need, in addition to the technoloE)'

conveyed, the technical assistance and training required to utilize it efficieatly.

The existence of alternative sources of supply is a factor worth

considering -from the aequirer's perspective-when selecting the most appropriate

technology transfer method. An acquirer who is informed as to the existence of

other sources of supply will be able to counterbalance the supplier's stronger

bargaining position. The acquirer can bring to the negotiating table information

concerning more advantageous prices and conditions offered to third parties by

those alternative sources.

The legal practice of the recipient country will have as weil, an important

bearing on the structure and contents of the arrangements through which

technology is to be transferred. Recent experiences are the legislations enacted in


1

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36

several Latin American countries for the regulation of foreign investment and

technology transfer agreements. These legislations are eharaeterized by the

increasing governmental intervention in the area of foreign equity holdings in joint

ventures and in the regulation of licensing agreements, mainly with regards to

royalty payments and restrictive praetices.

In a reeent study by UNCf AD (1988)116 a theoretical classification of

methods for transfer of technology was formulated according to two criteria: the

degree of control exercised by the foreign supplier over the process of transfcr

and the nature and degree of packaging.

A. CONTROL OVER TRANSFERRING PROCESS

Depf:nding on the degree of control exercised by the foreign supplier over

the teehnology transfer process, it is possible ta distinguish between direct and

indirect transfers.

A direct transfer of technology involves a direct relationship between the

individual acquirer or enterprise and a number of suppliers.117 The recipient

will acquire the technieal elements and knowledge needed (capital goods,

intermediate goods, spare parts as weIl as technical assistance, training,

engineering designs, etc.) from different sources through outright pure hases.

Direct mechanisms do not entail an ongoing relationship between the supplier and

the acquirer of technology; the former's responsibility is limited ta the delivery of

the goods.

The ability of an enterprise in a developing country to engage in direct

transactions will largely depend on whether or not the goods or the teehnological

116 UNCf AD, supra, note 5 at 30.

117 A. Omer, "Channels and Mechanisms for Transfer of Technology", in Teehnology Policies for Development and Seleeted Issues for Action, supra, note 6 at 30.

37

process embodied are prûtectt'd by patent rights. If it is the machinery producer

who holds the patent, the capital goods will be freely available in the

market.118 On the other hand, if the patent is held bya manufacturing company

which uses the machinery in its own production, their availability will be limited

and as UNCf AD recognizes, the transfer of the technology will be probably only

possible through an indirect mechanism.119 The existence of patent rights

could put the recipient in a disadvantageous position, since his ability to choose

the most suitable technology package will be restricted by the holder's

monopolistic or quasi-monopolistic control.

In addition, the acquirer's ability to choose this method over an indirect one

will depend on the availability of alternative sources of supply, on the recipient

enterprise's awareness as to the existence of those alternatives and more crucially,

on his degree of technological proficiency. As stated by UNCfAD, the conditions

for direct transfers through machinery suppliers are more favorable in developing

countries whose manufacturing sectors are already established and where sorne

indigenous capability has been developed.120 Such countries would not require

a great deal of technical assistance and/or training, or the conveyance of

managerial or marketing techniques in order to exploit the technology in an

economic and technically efficient way. We must recognize, however, that these

characteristics are not widespread amongst developing countries. Countries such

as Mexico, Argentina, Brazil, partially fall into that category. But not even the

"Big-Three" of Latin America have fully developed their manufacturing capacity in

ail sectors. It is safe to presume then, that an enterprise in a developing country

will engage in direct purchase mechanisms in order to meet very specifie needs


119 Ibid

120 According ta UNCfAD there are virtually no systematic data on direct transfers of technology to developing countries. However, "it is probably safe ta assume that a large proportion of the technical knowledge, and plant and machinery used in investment projects in those countries is transferred directly by suppliers in advanced countries". Ibid at 19-20

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and objectives (e.g. the replacement of an outdated equipment for a modern one;

acquisition of sparc parts for already acquired machinery). For the construction

of a new plant or the introduction of new manufacturing proeesses, for example,

the acquirer will more likely resort ta more complex indirect transfer rnechanisrns.

White direct mechanisms rnay avoid sorne difficulties associated with

indirect transfers, (priee mark-ups on plant and equipment and the transfer of

inappropriate techniques), their contribution towards the generation of indigenous

technology is questionable.121 Direct mechanisms involve the acquisition of

"consumptive technology", that is, the mere purchase or importation of technology

embodying products. In addition to the significant foreign exchange outlays this

entails, direct mechanisms do not encourage the absorption and adaptation of the

technology acquired to local conditions nor do they stimulat~ the development of

local technological skills in the acquiring country.

Indirect transfer mechanisrns involve an enterprise in an advanced country

which is "interposed" in the process and "takes upon itself the business of

contracting and organizing the individual suppliers",122 usually, through the

establishment of a wholly-owned subsidiary in the developing country. ln other

words, the supplier assumes overaH responsibility for the whole transfer and sub

contracts other technology suppliers.123 Indirect rnechanisms presuppose an

121 The problems of adaptation and absorption of technology as the basis for an effective conveyance of technology to developing countries will be discussed in detail in Section II, infra.

122 UNCTAD, supra, note 17 at 14

123 Omer, supra, note 117 at 30. Indirect transfers rnay present several variations. In the most simple type the

recipient makes a contractual arrangement with a single enterprise in the advanced country wltich organizes the individual suppliers. A second variation rnay involve the use of separate individual suppliers for sorne elements of technical knowledge, and the rernai11der may be supplied through an interrnediary company that will be responsible only for part of the transfer process. Another possibility is the existence of more than one contracting enterprise which supply different technical aspects,. e.g. engineering or manage rial skills. UNCfAD, supra, note 17 at 14.

!

ongoing relationship between the acquirer and the supplier of technology, which

could result in the long run, in agreements for technical assistance, training,

consultancy services, inter alia.

When dealing with an indirect technology transfer method, the supplier's

econornic returns normally depend on the economic performance of the

recipient.124 Accordingly, the former will attempt to ensure not only his

returns but also the maximization of profits by exerting different degrees of

intervention or "de facto control" in the operation of the acquiring

39

enterprise.125 This frequently results in the inclusion of restrictive practices in

technology transfer agreements, such as those requiring supplier's direct

intervention on enterprises day to day management, exports re!'!rictions, and

limitations on possible sources of supply of raw materials, inter alia. Furthermore,

since indirect transfers often involve the intermediary role of a wholly-owned

subsidiary, sorne other abusive practices are often detected, such as the

introùuction of price mark-ups on imported equipment, transfer pricing, excessive

royalties payrnents to disguise profit remittances abroad, among others.

The underlying reason for developing countries' utilization of indirect

mechanisms is the inadequacy and often lack of technical and corporate skills (e.g.

managerial and marketing skills) in domestic enterprises. Developing countries

are prevented from using th~ technical elements and knowledge acquired in an

economically efficient way, and hence, are encouraged to rely on the intermediary

role of companies in advanced countries that possess these capabilities. Indirect

transfers include the acquisition of technology through patent and trèldemarks

licensing agreements, turnkey arrangements in the case of complex long-term

projects, and managerial agreements.


125 As UNCf AD asserts, the supplier might attempt ta attain control over the operation of the project, by dictating management and marketing policies; by appointing technical directors in the recipient company or installing quality control departrnents of its choosing. UNCfAD, supra, note 17 at 30-31

1

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B. NATURE AND DEGREE OF PACKAGING

The second classification formulated by UNCf AD, attending to the nature

and degree of packaging, involves three main sub-cIassifications: simple direct

transactions, pro cess packages and project packages.

40

In the first category -simple direct transactions- the technology ta be acquired is

embodied in capital goods or machine tools. Since there is no packaging involved

the market priee of each technological component is known. 126

Through process packages the recipient has access ta the process by which

goods are produced. The suppliers of process technology market systems rather

than just components thus, in order to have access to the innovation the recipient

has to purchase the whole system. I27 Sorne of the disadvantages presented by

transferring technology through process packages -from the stand point of

developing countries- are firstly, that it contributes ta the reduction of competition

by concentrating the marketing and engineering skills in the hands of a few

suppliers; consequently, this method limits the choice of acquirers as to alternative

supply sources and prevents them from obtaining lower costs from other sources.

Finally, this method reduces the opportunities for using local capabilities (e.g.

engineering and manufacturers), thus hindering the gencration of local Research

and Development. l28

Project packages den ote transactions whereby technology "is acquired as

part of a larger transaction, which may include equity participation by the

transferor, the supply of raw materials and servicing".129 These mechanisms

126 Omer, supra, note 117 at 31

127 Omer, supra, note 117 at 31. The situation above mentioned takes place when the manage rial and engineering skills needed to put together the process are very specialized or when a supplier of machinery uses a major innovation in a particular compone nt ta package a whole process. Ibid.

128 Ibid


...

1'"

...

involve continuing supplier's control over the implementation, production and

management of the product. 130 These types of "highly packaged" transfers are

Iikely to occur when the technology is recently developed. UNCf AD recognizes

innovative technology as "an important source of monopolistic advantage and

bargaining power for the supplier",131 who win seek a considerable degree of

control over its use in the acquirer's hands. The supplier has several ways to

attain this control and maintain the commercial value of the technology.132

The most frequent practice is through majority equity participation on the

enterprise on the grounds that the construction and operation of the process

involve managerial and techn\cal skills not available in the local market.133

Another way is Iimiting the acquirer's potential ability to compete in foreign

markets, through the inclusion of restrictive practices in the agreements, such as

territorial restrictions on exports; field of use restrictions; grant back provisions.

II. LEGAL AGREEMENTS FOR THE TRANSFER OF TECHNOLOGY

Legal agreements for the transfer of technology are those involving the

transfer of industrial property rights and know how.

41

A. SALE OR ASSIGNMENT OF INDUSTRIAL PROPER1Y RIGBTS

Under a contra ct for the sale of industrial property, the assignee (purchaser)

acquires aIl the rights of the assignor (vendor) to the relevant piece of industrial

property.134 The owner of the technology does not retain any legal interest to

the assigned technology rights, since he/she transfers his flIll legal ownership to






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that technology.135

The advantages of an outright purchase of industrial property rights lie

first, in the fact that the acquirer will have greater freedom if! the operation of the

enterprise rnajnly in terms of the marketing of the products produced by the

technology. Secondly, the outlay of foreign exchange is minimized since payments

for the technology take the form of a lump-sumo The latter is specially important

from the stand point of developing countries.

The choice between this method and the most cam mon alternative -a

licensing agreement- depends mainly on the stage of technological development

and marketing expertise of the acquiring enterprise. The most propitious scenario

would be that in which the recipient enterprise is able to achieve its business

objectives without resorting to the assignor for further technical or managerial

assistance.

These considerations are critical for acquirers in developing countries, for

they often lack those skills required to operate a plant and obtain an economic

return from the efficient marketing of the products. This method will be more

suitable, then, for developing countries that have achieved the development of

manufacturing infrastructures in the sector involved in the sale of industrial

property rights.

B. LICENSING AGREEMENTS

1. General Aspects

A technology licensing agreement is defined as,

"the purchase, sale or exchange of certain rights relating to proprietary assets in which the licensor permits the lieensee to make

135 Castel and deMestral, International Business Transactions and Economie Relations, (Toronto: Edmond Montgomery Ltd., 1986) at 726.

1

or sell products, or use products or processes which involve inventions (patents), special knowledge (trade secrets and knowhow), names (trademarks), or the form or appearance of an original work (copyrights)".136

43

Following this definition, the subject matter of a licensing agreement may

include: trademarks, patents, know-how, trade secrets, copyrights and industrial

designs. This section will deal with the licensing of trademarks, patents and know

how, since these play the most significant role in developing countries.

Licensing agreements are viewed as a "middle approach between exporting

and manufacturing".137 They involve more work and commitment to foreign

markets than merely exporting, but fewer risks than owning and managing

manufacturing and distribution facilities.138

As recognized by Blakeney, through a licensing agreement the licensor will

be able to concentrate its commercial efforts in the production of technology

without having to assume the financial burden and commercial risks involved in

manufacturing, transporting and marketing the products of that technology.139

At the same time, the licensor will obtain other direct benefits such as royalties or

other payments for the use of the license, access to new markets otherwise

inaccessible, market testillg and reduction of the risk of expropriation. l40

Furthermore, the; licensor can take advantage of less costly materials and labor

existing in the licensee's country.

136 H. Blair, "Overview of Licensing and Technology Transfer', 1983,8 N.C.J. Int'I L. & Cam. Reg., No.3 at 167.

137 Ibid at 179

138 Ibid

139 See, supra, note 2 at 34

140 UNCTC, Licence Agreements in Developing Countries, 1987, United Nations, Document ST/CfC/78 at 1

r 1

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44

From the licensee's viewpoint, the main advantage of licensing agreements

is the acquisition of technologies and industrial processes already developed and

tested by the supplying enterprise. The licensee will avoid the risks, delays and

expenses involved in the development of such technologies or processes.141

Developing countries in their vast majority lack the resources -hoth

technological and managerial- necessary to engage in local R&D; therefore,

despite the existence of several methods for transferring technoklb'Y the use of

licensing agreements has become very popular.142

Other reason for licensing agreements' popularity in developing countries is the

desire of host countries to limit the amount of foreign equity participation in their

countries and to broaden the host countries' control over economic operations

within their borders".143

2. Remuneration for the Tecbnology supplied

A technology Iicensing agreement represents a bargain between the Iicensor

and a licensee who is not able to acquire the needed technology in the domestic

market or who is unaware of alternative sources. l44 Consequently, the price of

the technology and the terms under which it is communicated, will be largely

determined by the relevant needs of the licensee.

The payment clause is an essential part of a Iicensing agreement. Since it

should balance the economic interests of buth the licensor and the licensee it is


142 A UNCfC study revealed that in 1980, revenues to American firms from fees and royalties from developing countries alone increased by 22 per cent. The latter gives us an idea of the increasing importance that Iicense agreements have acquired. Supra, note 140 at 3.

143 Ibid


r ..

one of the aspects most difficult to agree on in the negotiation of a technology

transfer agreement. UNIDO SU~!g('~! ~I from the standpoint of the recipient, that

"it is necessary to relate the total payments for technology \\i~h the extent of

foreign capital participation, if any".145 FoHowing UNIDO's study, in cases

45

where the licensor has a substantial investment in the project,l46 payments for

technology should be kept lower since the licensor is already obtaining a return on

his investment by participating in profits and dividends of the enterprise.

Payments for technology by the Jicensee can take the form of lump-sum

fees; running royalties, usuaHy for the duration of the agreement; or a combination

of these two above. Lump-sum payments are coHected at the outset of the

licensed operation and are usualJy agreed on when dealing with less sophisticated

technologies in which the licensee will not necessarily require continuing technical

assistance from the Jicensor. This is not the most popular source of profit for the

latter, since he would rather seek ongoing participation in the enterprises' long

term profitability.

In those countries where th~re is no governmental control on royalty

payments or on profit remittances,147 the most common method for payment is

running royalties. These can be estimated based on production or net sales levels,

and sometimes they May even be based on profits.

Royalties based on actual sales is the most popular alternative sin ce sales


146 A substantial investment as suggested by UNIDO is 20% or more. Ibid

147 Royalties could be a convenient me ans of tax-evasion in countries with no control on royalties payment or on profit remittances. As it will be seen in Chapter III, infra, Latin American countries are aware of this situation therefore, the control on the payment of royalties and profits repatriation have become two of the pil1ars of their legislations on transfer of technology.

1

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figures are easily estimated. l48 One drawback of calculating royalties based on

actual sales, is that the licensee's enterprise cou Id be operating at a loss, specially

in the first years of production. One way ta deal with this prohlcm, suggested hy

UNIDO, is to link royalty payments to levels of profitability of the

enterprise.149 From the licensor's perspective this will not he a very popular

solution, unless he is "directly responsible for the management and is satisfied with

the prospects for profits or the licensee enterprise is in Cl very strong balgaining

position, as it may be if it has control over scarce raw materials." 150

Another method ta calculate running royalties would be to Iink payments 10

production costs. The licensee would benefit since production costs tend to

diminish with increased ~ales and production. Production costs however, may be

difficult to trace back and prone to manipulation, therefore royalties hased on

production volume are a less popular method. The licensor might not want to risk

his profits through this method preferring ta I\ecure a fixed return through

minimum percentages on sales, for example. 151

In the third type of payment agreement -the combination of lump-sum and

148 UNIDO, supra, note 16 at 19. When calculating royalties on the basis of saler J account should be takcn of the value of components and intermediate products im'.orted through or from the licensor. These values should be subtracted from the te .dl figure "SO that royalty is pa id as far as possible only on the value added by the local manufacturing unit". Ibid

149 Ibid

150 UNIDO, supra, note 16 at 19. The supplier's direct or indirect intervention in the management of the acquiring enterprise is regarded as a restrictive practice in sorne legislations since it entails foreign control over the local business. By way of example, Mexican legislation prohibits any direct or indirect intervention of the supplier in the management of the acquiril1g enterprise, with certain excepti()n~: guaranteeing efficient operations by the supplier; maintaming quality standards in the context of trademark licensing or when the supplier's access ta the accounting record~ does not entail their permanent control by the latter and is limitcd to verifying that the agreed royalties are being paid.

151 Ibid

47

running royalties- the lump-sum fee is viewed by the licensor as the initial

payment for basic research and development in respect of a particular

technological process. The actual fee charged may range from a small amount for

the transfer of initial documentation to a largt': sum for sophisticated process

technology that required a great deal of R & D.152 The running royalties can

be either a constant or a variable percentage of sales, production, etc., as already

mentioned.153

The duration of the agreement has direct inOuence on the total technology

payment. Where the royalty payments are Iimited to short periods the licensor

may try to increase the lump-sum payment as weil as the rate of the royalty.

UNIOO advises the licensee to evaluate carefully the incidence of interest charges

as weIl as the enterprise's production projections when negotiating the payment

clause. 154

One type of practice related ta payments for technology is charging fixed

minimum payments irrespective of production. Through these clauses the licensor

may be seeking ta obtain a minimum payment when he doubts that the plant will

be completed or that production will reach certain level within a reasonable

period.155 U nder these circumstances the licensee will be bearing a severe

financial burden since he will not be able to pay out of his earnings, let alone the

152 UNIOO, supra, note 16 at 19

153 UNIOO suggests an alternative ta this method: a total fixed fee (not linked to production or sales) payable in installments over the period of the agreement. This could be advantageous ta bath Iicensor and Iicensee; the former will secure a fixed level of earnings while the latter can regard it as a lump sum payment without the strain of having ta pay the amount from the outset of the agreement. Ibid at 20

154 Ibid. Furthermore, this study suggests that the licensee should evaluate lumpsum and royalties payments in relation ta costs of alternative technology or payments paid with respect to similar project.

155 UN 100, supra, note 16 at 20

1

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48

unjustified burden on the country's balanœ of payments.

3. Foreign Trademarks Licensing Agreements

a. Concept and Functions of Tlrademarks

A trademark may be a design or a ward or combination of both 156

protected by an exclusive right granted under the law, which t!nablt!s its holdt!r to

distinguish his goods or services from those of other enterprist!s.157

Trademarks accomplish several functions. Basically, a trademark provides for the

identification of the goods from a particular manufacturer or distributor (product

differentiation) and protects its holder against possible competitors. 158

Additionally, trademarks provide the consumers with certain degree of guarantee

as to the qualîty of tbe product159 and prott!cts them against imitations. Tht!

fulfillment of these functions will have unl!quivocal influence on the creation of

goodwill, that is, the attachment of buyers ta, and their propensity to purchase, the

product of the particular firm. l60

Trademarks also accomplish economic or commercial functions, primarily

156 Castel and deMestral, supra, note 135 at 722

157 See UNIDO, supra, note 16 at 2

158 J. Alvarez Soberanis, lIThe Need 10 Eslablish a Policy Restriclillg the Use of Foreign Trademarks in Developing Coumries: The Case of Mexicoll, 7 World Development, 1979, pp.713-726 at 714.

159 It is argued however that a trademark by itself does not guarantee high quality of a product, rather, it guarantees a degree of consistency that will bear on the consumer's decision ta purchase a determined brand over another. Moreover, a study of the effects of foreign trademarks in Mexico shows that in the perfume, cosmetic and wine industries, the quality of the products is not equivalent to the quality of the products manufactured in the country of origin, with the exception of foreign trademarks with real international prestige. Alvarez Soberanis, supra, note 158 at 714

160 E. Goldman, "International Trademark Liceruing Agreements: A Key to Future Technological Development", 16 Cal. W. Int'I L. J., 1986 at 182.

with regards to the marketing of the products. As acknowledged by Alvarez

Soberanis, trademarks' most important purpose is to generate or to preserve

"monopolistic advantages by separation on the markets and by intensive

advertising, with the intention of manipulating public demande Thus, it forms an

important element in the strategy of maximization of profits.,,161

b. Benefits of Foreign Trademarks Licensing

49

The main objective of a trademark owner will be that of giving his

trademark a market value, that is, turning it into an asset. A trademark licensing

agreement is one of the ways available to a trademark owner to exploit his

trademark in foreign markets with reduced or minimized commercial risks while

receiving an economic return in the form of royalties. The licensor will minimize

his commercial risks since it is the licensee who will be in charge of manufacturing

and marketing the goods with his own resources thus bearing as weIl, the risks of

the enterprise's profitability. Moreover, it is the licensee's effort that will maintain

the market value of the trademark mainly through intensive advertising, while the

long term benefits -creation and maintenance of goodwill- will directly accrue ta

the licensor.162

The benefits accruing ta developing countries in the long run, are not

clearcut. It has been acknowledged from the stand point of these countries, that

the "benefits of foreign-owned trade marks are much more limited than their

negative effects".163 Developing countries' benefits from trademarks licensing

will basically depend on whether the products represented by the trademark are

161 Alvarez Soberanis, supra, note 158 at 715. This author states that as opposed ta patents, a trademark confers to its holder a permanent monopolistic advantage, since its validity may be renewed indefinitely.

162 Chudnovsky, D. "Foreign Trademarks in Developing Countries", World Development No. 7, 1979, pp. 663-682 at 667.

163 UNCT AD, The Role of Trade Marks in Developing Countries, 1979, United Nations, Document TD/B/C.6/AC.3/3/Rev.1 at 37

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manufactured in the Iicensee's country. Under this circumstance, foreign

trademarks Iicensing can contribute to the establishment of manufacturing

infrastructures in the developing country, as well as to the generation of new

marketing strategies and skills to facilitate the distribution of the products

manufactured under the license. l64 The advertising activity carried out in the

licensee's country will also be beneficial as long as local professionals and

personnel are employed.165

c. Disadvantages of Foreign Trademarks Licensing

Despite the above mentioned benefits, it is still a matter of controversy

whether foreign trademarks licenses play an effective role as vehicles for the

transfer of technology ta developing countries. Since trademarks are usually a

part of a complex transfer of technology agreement involving other industrial

property rights mainly patents or non-patented know-how, their developmental

significance is difficult ta assess.

50

The mere importation of the trademarked products, rather than local

manufacturing of goods under license, is seen by developing countries, as the Most

tangible negative aspect of foreign trademarks licensing. According to UNCf AD,

in those developing countries that have been able to develop the manufacturing

sector, "trade marks mostly coyer goods made in the country, white in the

remaining developing countries they are used to commercialize imported

goods".l66 The majority of developing countries do not have a developed

manufacturing sector. This absence of local manufacturing prevents these

countries from generating domestic technological skills and from establishing

manufacturing and marketing infrastructures. It could be presumed, then, that


165 Ibid


foreign trademarks licensing is only encouraging the acquisition of consumptive

technology rather than generative technology.167 It is in this context where the

effectiveness of trademark licensing agreements as methods for the transfer of

technology to developing countries becomes questionable.

51

Licensing agreements of foreign trademarks constitute a considerable part

of ail the transfer of technology flow to developing countries and amongst them

Latin America. l68 According to Alvarez Soberanis, the increasing use of

foreign trademarks is due to the local industries' attempt to derive higher profits

from the exploitation of a captive rnarket.169 Latin American governments

have placed their attention on the long-term effects of foreign trademarks

licensing and accordingly, have identified several factors of cam mon concern.170

Basically, Latin American governments have identified a strong tendency

towards the excessive use of foreign-owned trademarks in sorne sectors,

characterized by the absence of any technological contribution to the

country. 171 This could place the Iicensee enterprise in a relationship of

growing dependence on the trademark holder, which in the long run could

endanger the investment or industry itself.

This "dependence" situation becomes more obvious as from the date of

termination of the agreement when the licensee may lose his participation in the

167 See supra, note 62 and accompanying texte

168 In Mexico for exitmple, foreign trademark licensing represented back in 1975, 48% of the total of contracts recorded at the National Registry for the Transfer of Technology. Alvarez Soberanis, supra, note 158 at 720. (Mexico's legislation on technology transfer will be studied in Chapter III in greater detail).

169 Alvarez Soberanis, supra, note 158 at 715

170 See C. Corre a, "Main Issues in the Regulation of License A"angements on Foreign Trademarks: VIe Latin American Experience", World Development, No. 7, 1979, pp.705-711 at 706

171 Ibid

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market which he gained and may even be faced with the competition by the

former licensorl72, or will be forced to use his own trademark which may enjoy

no goodwill.173 Since the maintenance of the foreign market is dependent

upon the continuation of the license, the exports of trademarked goods and

consequently, the balance of payments, could be endangered.

52

Latin American governments are increasingly concerned about the negative

effects on the balance of payments and on the general economic situation of the

acquiring country, deriving from the payment of royalties and the inclusion of

restrictive practices in the license agreements. 174 Of great concern as weil, is

the impact on consumers of the costs involved in the Iicensee's promotional efforts

ta introduce and maintain the licensed trademark in the market. Since the

goodwill created in connection with such trademarks might eventually be

appropriated by the trademark owner without any charge, these costs as weil as

the royalty payments ta trademark holders, are transferred to consumers in the

form of higher priees charged for trademarked goods.175

172

Direct Costs of Foreign Trademarks Licensing

There are substantial direct economic costs ta trademark licensing. The

Alvarez Soberanis admits the occurrence of this situation in Mexico: "1 have known of cases in which the owners of trademarks residing abroad have taken advantage of the marketing efforts of national licensees and upon termination of the contract authorizing the trademark's use, they have refused ta renew it and have, instead, established branch offices in our country, thus totally eliminating the former licensee from the market". Supra, note 158 at 715

173 Chudnovsky, supra, note 162 at 667. UNeT AD shares this concern and recognizes that "licensees are developing goodwill not for themselves but for the owner of the mark. The licensee's efforts will result in greater prestige for the licensor and not for the licensee". UNcrAD, supra, note 163 at 22

174 Refer ta First Chapter, infra at 28 et seq.


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53

payment of royalties for the use of the trademark is the most immediate expense

incurred by the licensee. It is not however the one bearing the highest costs.176

The indirect costs that is, the costs of advertising and of maintaining quality, inter

alia, are even more burdensome th an the royalty itself. As expressed by Alvarez

Soberanis, "a reasonable licensor do es not have to in si st on a high royalty rate, but

would prefer the licensee to make an intensive effort in the advertising field and

ensure that his trademark be known by the quality of the products it

represents".177

Chudnovsky argues that foreign owned trademarks contribute to the

misallocation of resources in favor of foreign subsidiaries and/or non-

residents. 178 This misallocation of resources is reflected in the balance of

payments burden in two ways: through royalty remittances for the use of foreign

trademarks and through an increase in foreign firms' remittances by several means

such as technical fees, dividends, interest payments, overpricing of imports, intra

firm royalty payments, inter alia.179 To these we can add the inclusion of

clauses restricting the export of trademarked goods which have a direct effect on

developing countries' balance of payments deficit.

Indirect Costs of Foreign Trademorks Licensing: Socilll and cultural eJfects

ln order to give his trademark a commercial value and consequently creating

goodwill, the owner will incur overhead costs, mainly advertising expenses. Since

the licensor usually controls the advertising design and the way in which the

trademark is exhibited, licensing agreements frequently fix an amount to be spent


177 Ibid

178 Chudnovsky, supra, note 162 at 674

179 According to Chudnovsky, the high profitability achieved by the foreign firms resulting from the use of foreign trademarks is responsible for this situation. Supra, note 162 at 674

1 on advertising as a lump sum or percentage of sales; 180 advertising costs within

the domestic market will be borne by the licensee thereafter.

54

The effect of persuasive advertising of foreign trademarks on developing

countries is noticeable. One of the most obvious social consequence is the

redefinition of local consumption patterns, and even more, a redefinition of basic

needs. It has become common practice amongst consumers in these countries to

discriminate in favor of foreign trademarked goods instead of locally manufactured

ones,181 that would be more appropriate ta satisfy the basic needs, mainly of

those classes with low incarnes.

The magnitude of the resources devoted to the advertising activity, especially

in those developing countries with large domestic markets (e.g. Brazil, Argentina,

Mexico, Israel, India, inter alia) has been estimated ta be 70% higher than

research and development expenditures.182 It is easy to recognize, as UN(.ï AD

does, the role that advertising plays in the misallocation of resources in developing

countries:

180

"In countries where resources required for solving the basic problems of underdeveloprnent are sa scarce and/or have ta be obtained from the industrialized world at a considerable cost, devotin~ such amounts of resources to advertising is hard ta justify". 83

The misallocation of resources is reflected as weIl in the use of labor-saving

Chudnovsky, supra, note 162 at 669

181 This tendency is more obvia us in the capital goods market. As recognized by UNCf AD, when these industrial goods are manufactured domestically, the support of the trade mark through a license from an internationally recognized firm is usually required in arder for a domestic enterprise ta compete in the internaI market with foreign importers of industrial goods. See UNCf AD, supra, note 163 at 24

182 See Chudnovsky, supra, note 162 at 670. (Calculated on the basis of information published in the UNESCO Statistical Yearbook, 1975).

183 UNCTAD, supra, note 163 at 31

r

55

techniques for the rnanufacturing of products which do not make full use of the

availability of labor and inputs. l84 This commentary is valid where there is in

fact domestic manufacturing of the trademarked goods; as mentioned already,

trademarked products are not always manufactured in the licensee's country.

Rather, these are frequently irnported to the country.18S The consequences of

the use of labor saving techniques in developing countries are manifold. Firstly,

there is no contribution to the generation of new sources of employment while at

the same time the developrnent of indigenous technological capabilities is

hindered. Secondly, the foreign exchange outlays entailed by the importation of

capital goods for the manufacturing process may affect the country's economic

situation.

The Iicensor may also want ta retain the right to intervene in the

management of the Iicensee's enterprise in order to assure quality standards. As

Alvarez Soberanis writes, "this intervention may go beyond such contraIs and

become a source of annoyance, since it also extends to activities outside the

technical field such as buying policy, sales policy, determination of advertising

expenses".l86 The inclusion in the agreement of tie-in purchases clauses

whereby the licensee is obliged to acquire raw materials or intermediate products

from the Iicensor or a source designated by him, is another way to main tain high

quality standards that may be the source of abuses and inconveniences for the

licensee's operation.

In an attempt to offset the negative effects resulting from the licensing of

foreign trademarks, specially the "dependence" effect, certain Latin American

countries have proposed sorne policies, not ail of which have been taken to

practice. One proposition is ta impose a tax on products bearing trademarks of

184 Chudnovsky, supra, note 162 at 675

185 See supra, footnote 166 and accompanying text.


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foreign origin in order to discourage their use (by making it more expensive) when

it is associated with the transfer of technology already available in the importing

country.187 Another option is linking the foreign trademarks with a national

trademark. Through this measure the "licensee acquires prestige for its own

trademark at the same time that the license agreement is performed".I88 The

licensee will not lose the goodwill he developed for the foreign trademark once

the agreement expires or if the licensor does not wish to renew it.189

For aIl the above mentioned negative aspects, it is not surprising that

amongst Latin American scholars licensing of foreign trademarks is not well-liked.

From the perspective of their effect on Mexico's balance of payments, Alvarez

Soberanis concludes "that the use of foreign trademarks is not advantageous for

the cou.,try, since it involves the loss of foreign exchange and does not stimulate

the generation of income through exports".t90 Following similar tines, Correa

asserts that the experience in Latin America clearly shows that the role of

trademarks licenses is, in many aspects, "negative for national economies and

principally for the development of an independent capacity of competition and

187 Proposed by the Commission of the Cartagena Agreement author of the Andean Foreign Investment Code, (Decision 24) this stipulation has not been applied for two basic reasons identified by Correa, supra, note 170 at 708: 1) the proposed tax could be transferred to consumers by raising the final priee of the goods and 2) because the assessment of the basis on which the tax is to be applied should take in account that trademarks' value differ significantly depending on their history, consumer's loyalty, economic sectors concerned, etc.

188 Ibid at 709

189 Mexico introduced this practice in its patent and trademarks legislation in 1976; however, it was abolished in 1987 due to a strong negative reaction sr;':!cially from multinational enterprises operating in Mexico. A similar approach was followed by Argentina where the licensee's trade name is jointly advertised with the licensed trademark, so that consumers recognize the local manufacturer of the products.


•

, ... 57

growth in local and foreign markets".191

From a socio-cultural standpoint, it is argued that due to the modification

of consumption patterns, foreign trademarks may "provoke a depersonalization of

our society,,192. Moreover foreign trademarks are seen in many cases as "a

residual expression of colonial mentality which impedes our believing in the value

and the quality of our products".193

4. Patent Licensing Agreements

A patent can be defined as,

lia statutory privilege granted by a government to an inventor and to other persons deriving their rights from the inventor, for a fixed period of years, to exclude other persons from manufacturing, using or selling a patented product or from utilizing a patented method or process".194

Patents can contribute to the transfer of technology to devdoping countries

firstly, through the exportation to a recipient country of the products or process

embodying that technology (this is generally the result of non-exploitation of the

patent) and secondly, through the manufacturing in the recipient country of the

goods embodying the technology. Manufacturing can be carried out either by the

pate:nt holder himself or by a licensee through a patent licens~ agreement.195

191 Correa, supra, note 170 at 710

192 Alvarez Soberar.is, supra, note 158 at 717. Although the author is referring tCl Mexican society, the commentary might as weIl be valid for aIl Latin American countries.

193 José Campillo Sainz, Secretary of Industry and Development, Comercio Extc~rior, Vol. 26, No.8 (Mexico: August 1976)

194 UNCf AD, "The RaIe of the Patents System in the Transfer of Technology to Developing Countries", 1975, United Nations, Document TD/B/AC.11/19/Rev.l at 5

195 It has been estimated however, that patents represent less than two per cent of the technology which is transferred ta these countries. See supra, note 2 at 87.

1 !

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Two of the major concerns of developing countries regarding patents arc

ownership and patent utilization or exploitation. As revealed in a study by

UNCfAD, about 84% of ail valid patents in developing countries are foreign

owned (most of them are in the hands of corporations) and about 90 to 95 per

cent of these are not exploited.1%

5H

The non-exploitation of patents, that is, the absence of production within the

granting country brings as a result the importation into the domestic market of the

patented product or process or their substitutes. As UNCfC explains, it is not

uncommon for a patent holder who has no immediate intention of Iicensing his

invention abroad, to apply for protection abroad and then decline to work the

patent. The reason for this behavior is to control the market of the country

granting protection by preventing the importation into it of goods l'rom the patent

holder's competitors.197

Whether patents' non-exploitation is manifested in the importation of the

product embodying the terhnology patented or in the importation of substitutc

products, the negative consequences for the developing country are manifold.

Patent non-exploitation results in low capability to absorb surplus labor and create

additional domestic income and employment. The inability to use local materials

and national scientific, technological and engineering capabilities Iimits the

possibilities for "learning by doing" and reduces the prospect for raising the

technicallevel of the work force. 198 Additionally, the non-exploitation of

patents brings as a consequence foreign exchange outlays that adversely affect the

balance of payments.

196 UNCf AD, supra, note 194 at 56. According to UNCf AD, nationals of developing countries owned by 1975, less that one-sixth of the patents granted in their own countries. With regards to patent utilization, this study reveals rates as low as 5% in Argentina, Chile and Mexico; and 1.1% in Peru.


198 Ibid at 57.

59

Many developing countries are introducing the use of "compulsory licenses"

into their patent laws in order to offset the negative effects of non-exploitation of

patents. A compulsory Iicense is "an authorization to an entity or person other

than the patent holder to do, without such patent holder's bargained-for

authorization, acts which would otherwise be prohibited by the patent".I99

8. BeDefits of Patent LiceDsing

ft has been asserted that, besides the earning of pat'!nt fees, developing

countries have only one logical justification for their int\!rest in the patent system,

which is the acquisition of technological information through the documents filed

by the holders for the registration of their patents.2OO UNCf AD however, has

identified several advantages to patent 1icensing. Primarily, the inflow of foreign

technology and capital might be encouraged by industrial property protection.

Secondly, patent licensing involves the possibility that sorne of the local production

might be exported and therefore earn foreign exchange.201 It is important to

note, as UNCf AD explains, that those advantages can only be attributed to

patents as long as they are the main reason for the Iicensor's decision to locate

production in that specific market. 202

b. DisadvBDtages of Patent Licensing

In cases where it is the patent-holding company itself that exploits the

199 UNCfC, supra, note 140 at 12.


201 UNCf AD, supra, note 194 at 57. Additionally, UNCf AD mentions the domestic value added from production and tax revenue accruing to the government.

202 UN cf AD, supra, note 194 at 57. The licensor could have other reasons such as availability of raw materials, cheap labor costs, favorable geographical situation, tax incentives, inter alia, which May have more bearing on its decision to locate production in a country, than the patent system itself.

T

patent in a developing country, UNCf AD has identified the overpricing of the

import priees of inputs. As this institution affirms, "priees recordcd for these

imports may differ drastieally from priees for similar products e1sewhere in the

world and such 'transfer-pricing' can lead to substantial outtlows of fordgn

currency".203

60

Where the patent is exploited through a licensmg agreement, the Iiœnsec

could frequently encounter the inclusion of restrictive practices m the agreement.

The most frequently found are:204 export restrictions illtroduced in order to

preserve the patent-holder's control over the production location (a deve10pmg

country in this case) as well as to avoid competition from the liœnsee m those

markets that may be supplicd by the corporation on its own behalf; grant-hack

provisions whereby the licensor acquires property rights over any improvemcnts or

innovations developed by the licensee; intervention in the management and

marketing decisions of the licensee's enterprise; field-of-use restrictions.

s. Know-how Licensing Agreements

Know-how includes information concerning the organization, management,

operating procedures and marketing techniques of a commercial enterpnse.205

Therefore, it has traditionally been protected not by registration under statute, hut

as a trade secret or by strict corporate security and confidentléllity.2()6

203 UNCfAD, supra, note 194 at 58. This practicc IS particularly trequent in the pharmaceutical field. A study conducted in Colombia revealed that overpricing of imports charged by foreign companies was 155 per cent above the world's average. See supra, note 2 at 88.

204 Refer to Chapter 1, supra, for more details about these restrictive practices.


206 There is considerable controversy around the legal nature of know-how. Whether or not it is deemed as the propriety of the technology supplier, will have significant bearing on the effects of the know-how licensing agreement, specially with regards ta the maintenance of its confidential or secret character after the expiration

.'

Although know-how can be Iicensed or sold in the same agreement in which

trademarks and patents are, it is common ta grant know-how rights in separate

agreements.

61

Besides a tangible form, (blueprints, drawings, films, computer software,

instructions for the assembly aad operation of machinery, etc) know-how is

frequently transmitted in an intangible form through technical assistance, training

and management arrangements.

a. Technical Assistance agreements

Technical assistance agreements are a way to transfer "the benefit of the

supplier's experience with the pro cess of commercialization and the adaptation of

the technolob'Y tn the conditions prevailing in the receiving country".207 The

services provided by the supplier under this type of contract include those

necessary for the operational stage of the enterprise: maintenance and repair of

machinery, advice on process know how and quality contro1.208 Consullancy

services (i.e. feasibility and market studies, selection of location) as well as

engineering services (design and construction) may also be included in technical

assistance agreements.209 But as Radway states, the essential elements of

of the agreement. In common law jurisdictions the doctrine '" divided between the supporters of

the proprielary nature of know-how and those opposing it. In countries following a Civillaw system the prevailing view is that of the non-proprielary nature of know-how. ln France for example it is a matter of appropriation de fait. In Latin America, these agreements are dealt with from the stand point of whether they constitute a definite transfer or rather they can be reclaimed by the supplier. The prevailing view in these countries is that agreements for the transfer of know-how constÏtute a sale ta the reclpient, thus not recoverable. See Correa, supra, note 20 at 400.

207 R. Radway, "Transfer of Technology 10 Colombia: A Proposai 10 Modify Decision 24", 12 Lawyer of the Americas, 1980 at 32fl


209 Ibid

1

1

technical assistance agreements are pt~rsonnel training and adaptation assistance

through experience transfer.210

b. Training of local persoillnei

62

These agreements -temporary by nature- are normally part of technical

assistance agreements. They can also form separate con tracts. Training of

domestic personnel that would eventually take labor and manage rial control of the

enterprise, is a valuable means for attaining the technological and managerial

skills and knowledge needed ta develop mdigenous technologlcal capahllities. ft is

therefore, crucial ta the effectiveness of the transfer of technology to developing

countries. Since developing countne:s often lack the ski lied lahor and/or

managerial capacities to set up and operate an enterprise, specially when dcaling

with complex proJects, technical assistance and training agreements are a necesslty,

rather than a supplier's imposition.

Conflicts have appeared however, in the Ci.Jntext of payments for technical

assistance and training provided by a parent corporation to Its wholly-owned

subsidiary in a developing country. The supplier corporation on one hand, asserts

that it is entltled ta an economic re,turn for the economic and human resource~

allocated in order ta provide the te:chnical assistance and traInmg to Its ~uhsidiary.

On the other hand, many Latin American countries have prohihited at dittercnt

times, Întra-firm payments of royalties or fees for "intangible technologlcal

contributions", that is, technical assistance and training.211 These countries

base this policy on two theories:

Economic Unity Docl'rine:212 this theory upholds that the

subsidiary is a mere instrumentality of its foreign parent corporation; therefore


211 See, Chapter III, infra.

212 Radway, supra, note 207 at 333.

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63

"nothing of value is being provided to the subsidiary which would not otherwise be

provided, so the parent should not be permitted to receive royalties or fees for

intangible technological contributions made to the subsidiary".213

Taxation 711eory: the supporters of this theory agree that the

prohibition of intra-firm payments of royalties and fees for intangible technology

has its origin on suspicions of tax evasion. This is the reason why along with the

prohibition of such payments most legislations prohibit their deduction for the

purpose of computing the profits of the subsidiary.214 In our opinion, this last

theory retlects to a large extent the behavior of parent corporations and their

subsidiaries in developing countries, thus constituting a sound basis for explaining

the prohibition of these payments.

c. Management arrangements

These contracts are defined as "arrangements where operational control of

the enterprise ... is vested by contract in a separate enterprise which performs the

necessary managerial functions in return for a fee".215 From the contractor's

perspective, management con tracts are an effective way of controlling an

enterprise in a developing country without necessarily committing capital

resources, while ownership remains in the hands of the local entrepreneurs.

Moreover, management agreements could be a way for foreign entrepreneurs ta

213 Radway, supra, note 207 at 333. Although there is no parallei civil law concept in any Latin American country, this doctrine may be said to have analogous effects as the common law doctrine of "piercing the corporate veil", whereby courts will disregard the separate legal existence of corporate entities in order to show that a given corporation has no existence on its own being a mere instrumentality or agent of another, thus holding the "real" party liable as a matter of justice. Ibid

214 Radway, supra, note 207 at 334. See Third Chapter, infra, for an analysis of ANCOM's legislation in this matter.

215 See UNCf AD, supra, note 17 at 39. Management arrangements may be Iicensed alone, but more frequently they are part of joint ventures and turnkey projects.

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avoid many of the political and economic implications of wholly-owned subsidiaries

in developing countries.

UNCf AD contradicts this view by asserting that the chief concern of

developing countries' governments is not the question of ownership itself, but nI'

ownership as a vehicle for control. Since management contracts are "precisely a

mechanism for functional control (albeit temporally Iimited and informai control),

it is open to similar objections as the wholly-owned subsidiary".216

III. COMMERCIAL ARRANGEMENTS FOR mE TRANSFER OF

TECHNOLOGY

Commercial agreements are usually part of a complex arrangement

involving the provision of finance, raw materials, skilled labor, engineering and

management services. marketing assistance, etc. Therefore, these agreements

entail much more th an a simple transfer of industrial property or know how.

Amongst the most common commercial arrangements for the transfer of

technology to developing countries we find: turn-key contracts, joint ventures, and

marketing arrangements such as distributorship and franchises.

A. TURN-KEY PROJECTS

Under a turnkey contract one technology supplier (contractor) "carries out the

full range of technical and managerial operations needed to establish an enterprise

... and turns over the management of the enterprise in full operating condition to

the local owner as soon as he is prepared to assume it".217

Turnkey projects are the best example of a highly packaged form of

transfer. These agreements combine embodied as well as disembodied

technologie al knowledge, from feasibility studies, design of plant, tenders, to


217 Ibid at 38

,.

65

installation of machinery and equiprnent, quality control and plant management.

There is sorne variety in the content of turnkey agreements. According to the

degree of participation of the supplier of technology in the planning and operation

of the project, turnkey agreements can be c1assified as:

1. Turn-key projects proper: which provide for the construction and

commissioning of an industrial complex in accordance with a design and

incorporating technology selected and supplied by a single contractor.218

2. Semi-turnkey contracts: whereby the supplier undertakes to effect the

major proportion of the establishment of the industrial plant (procurement,

construction, erection and delivery), while the design and general and detailed

engineering are undertaken by the acquirer or an independent

subcontractor.219

3. Product-in-hand: whereby the contractor/supplier guarantees a pre

determined level of production, that is, lia specified amount of output over a

period of one ta several years from take-over of the plant by the acquirer".220

In arder ta carry out this agreement the contractor will have ta manage the plant

for certain period of time to be determined by the parties.

The selection of one type of turnkey agreement will largely de pend on the

experience of the acquirer in the relevant field. This is generally the most

appropriate method for transferring technology ta developing countries when the

construction and operation of a large scale industrial plant (e.g. power generation

through hydroelectric plants, highway systems, etc.) is sought.

For developing countries the main advantage, at the outset, is that aU the

skills required to organize and set up the project will be provided by the supplier,

thus reducing the risks of failure or inefficiency if the inexperienced recipient



220 Ibid

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enterprise were to take on the job itself.221 On the other hand, turnkey

projects present certain disadvantages for developing countries. The continuous

reliance of the recipient enterprise on turnkey con tracts leaves liule room for the

development of indigenous technological capacity. Furthermore, developing

countries may face high hidden costs due to the marking up of equipment

prices.222

A way to overcome these disadvantages may be the graduai unpackaging of

the technology transferred.223 Regarding the co st of the components of the

package, Omer suggests the itemization of paymellls based on a detailed analysis of

the origin and costs of different components such as technolo!,'Y, design,

engineering, procurement, construction and delivery. As to the operation of the

project itself, this author suggests an unpackaging process that gradually increascs

the participation of the acquirer in the decision making process both at the

managerial and technologicallevels.224 This process entails the following

stages: an increase in the acquirer's leclmological comribul;oll in each stage of the

implementation of the project; the acquirer's association and participation in

decisions regarding procure ment and operations; the inclusion of a comprehensive

training program at ail stages of project completion, including operation and

maintenance; acquirer's participation in design and basic engineering of the project;

acquirer's right of access ta improvemellls and to aIl desigll and detailed ellgineering

illformatioll, as weIl as right to introduce modifications, in order to manufacture

spare parts locally. 225


222 Ibid


224 Ibid

225 Ibid at 34

67

B. JOINT VENTURES

The main feature of joint ventures is "the ability to combine the strengths,

expertise, technology, and know-how of separate businesses with a sharing of

investment, costs and risks".226 It is important to distinguish between two types

of joint ventures: the equily joint venture and the conlrac/Ual or non-equity joint

vemure.

In an equity joint venture the assets, rights and liabilities are shared by the

parties through Joint ownership of an incorporated enterprise.227 The

enterprise becomes the owner of the resources contributed by each party and its

profits are shared among the participants in previously agreed proportions. Equity

joint ventures are established where the legislation of the host country does not

permit direct foreign investment or where limits of foreign holdings are

established. The latter is a common occurrence in Latin America.228 The

establishment of equity joint ventures will depend as weil on the degree of

assistance that may be required from the foreign partner in terms of production,

226 J. Dobkin, International Technology Joint Ventures in the Countries of the Pac;fic Rim, (Singapore: Butterworths, 1988) at 5.


228 A1together prohibition of foreign ownership is not the general rule in Latin America; rather countries prohibit foreign ownership in key sectors of the economy reserved for exploitation by nationals or by the State itself. The approaches taken by each country were diverse, although the main ide a behind them ail, was as mentioned already, the graduaI transfer and assignment of actual control over the technology to locals. By way of example, the Mexican law of 1973 created four categories of investments depending on the foreign-local holdings proportion: a) investments reserved exclusively to the State; b) investments reserved to parastatal enterprises; c) investments reserved to enterprises exclusively composed by mexican nationals and d) investments in which foreign participation was limit~d to 40% or less. Decision 24 of the Andean Common Market creatt:d three types of enterprises: a) national companies with 80% or more ownership by national investors; b) mixed companie:; which were between 50% and 79% owned by nationals; and c) foreign companies 49% or less owned by nationals.

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management and marketing229 that is, on the ability of the local partner to

absorb and adapt the acquired technology. The greater the latter's need the more

likely the foreign partner will seek a degree of equity participation on the venture

proportionate ta his contribution.

In a non-equity joint venture the obligations of the parties are defined on a

contractual basis.230 This type of joint venture is usually project oriented,

therefore established for limited dura tian and in those host countries where

foreign ownership is prohibited.231

In the Latin American experience, equity Joint ventures became a popular

alternative to FDI during the 1970's when the governments started focusing on

ways ta shift control and decision making from foreign enterprises to their

nationals and at the same time encouraging the local development of

technology.232 In order ta attain these objectives, Latin American governments

enacted legislations regulating the entrance of foreign investment. The Mexican

Foreign Investment Law of 1973 and Decision 24 -The Andean Common Market

Foreign Investment Code of 1970_233 are examples of this legililative trend that

in the long run would reformulate the relations between the Latin American-host

countries and the foreign investors.

As Omer states, "[T]he share of equity in the hands of local partners and

its legal effects on the decision making mechanism have an important incidence on

the technology transfer process".234 By strengthening the local partner's

229 UNIDO, supra, note 16 at 7-8


231 Ibid

232 R. Radway, ''Antitrust, Technology Trans/ers and Joint Ventures ln Lalin American Development", 15 Lawyer of the Americas, 1981, 47-70 at 63

233 See Third Chapter, infra, for an examination of these laws.


"

69

bargaining position, developing countries' governments are ensuring that crucial

commercial aspects of the pro cess of acquisition of technology will be adequately

considered from the Iicensee enterprise's viewpoint.235 Consequently, the

economic and social needs and objectives of the acquiring country itself will be

taken into account as weil.

From the perspective of transnational corporations, holding minority equity

participation in a joint venture -as it may be required by the law of the host

country- could pose problems of management and control.236 The willingness

of foreign investors to participate in joint ventures on a minority basis, although

steadily increasing as UNIDO asserts,237 still de pends on several factors such as

the over-all investment climate of the hast country and on the size and

profitability of the market and its future projections.238

However, the advantages that could be derived from a joint venture might

offset these inconvenience~. As Radway explains, by holding a minority equity

participation in a joint venture, transnational corporations could receive a greater

return on the technology, particularly for intangible technological contributions

(i.e. training, technical assistance) which could otherwise be prohibited in the

context of parent corporation and wholly-owned subsidiary relationship.239

From the perspective of developing countries one of the most significant


236 Radway, Comparative Evolution of the Technology TransfeT Po/ides in Latin America: 11le Practical Realities, 9 Den. J. of Int') L. & Pol'y, 1980 at 210

237 UNIDO, supra, note 16 at 7. This study attributes this change of attitude to the desire of foreign companies to circumvent quantitative import restrictions imposed by developing countries on products that are locally manufactured. Ibid

238 Ibid

2.'\9 ~adway, supra, note 236 at 211. See Third Chapter, infra, regarding ANCOM's legislation on the matter. See as weIl, supra, pages 84-85 for the theoretical foundations of this policy in Latin America.

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70

advantages derived from joint ventures is that they furnish the local partner with

the opportunity "to identify those aspects of any particular process, piece of

equipment, or product that can be replaced by local resources".240 In this way,

the developing country could increase the utilization of local inputs in the

manufacturing of products, thus promoting the development of national industries,

upgrading their competitive levels, and creating new employment sources.

Additionally, joint ventures require minimal foreign exchange outlays -as opposed

to other transferring methods such as licensing and direct purchases- which is a

primary objective of developing countries' when engaging in international

technology transfer.

In practice the types of joint ventures that best carry out the process of

technology transfer to developing countries -in the sense that they encourage the

generation of local technological capabilities- are: joint research ventures241

and production sharing joint ver,tures.242

c. .MARKETING ARRANGEMENTS

Distribution and franchising agreements are frequently used by overseas

technology suppliers to penetrate markets in developing countries.

1. Distributorship

Under a distribution agreement a manufacturer supplies goods to an

240 Radway, supra, note 236 at 210. As this author writes, this unique position of the local partner is referred to "as the local partner supplying the "know-w/w" while the foreign firm supplies the "know-how". Ibid

241 Joint research ventures are regarded as an efficient means for transferring technological knowledge sin ce they involve the exchange and diffusion of technological information and practical training in laboratories. Omer, supra, note 117 at 34

242 In this type of joint venture, the operational responsibility over the project corresponds to the foreign partner as a general contractor, whereas the management is usually conducted by a joint committee or through a "phasing out" scheme. Ibid

enterprise which then arranges for them ta be supplied to end users.243 As

expressed by UNCfC, this type of agreement "reflects the stage between a pure

import-export approach ta a foreign market and the more advanced licensing

arrangement".244

71

Although the distributor (acquirer) takes title to the goods as an independent

contractor, the grantor will usually exert great control over the former. The

grantor will place limitations su ch as: territorial allocation, advertising, quality of

gClods on sale, risk allocation and distributorship procedure.245 Distributorship

agreements will be subject to the same concerns, considerations and restrictions as

a typical Iicense agreement, although "the control exerdsed by grantors over the

distributors is consistently greater th an that exercised by licensors over most

Iicensees".246

2. Franchising

As defined by Blakeney, franchises entail the supply of goods or services

manufactured by a franchisee utilizing the trade mark or other industrial property

rights of the franchisor.247 Nowadays however, a franchise entails much more

than merely conveying the right to use a trademark; it has become a detaHed

business arrangement that "permeates every aspect of the business, detailing

methods, product standards and management-employee conduct. It is running a

business by the Iicensor's operating manual, down to the colour of napkins and

content of training seminars".248 A characteristic feature of franchising


244 UNCfC, supra, note 140 at 17

245 Ibid

246 Ibid

247 Supra, note 2 at 47.

248 UNCfC, supra, note 140 at 18

1 72

agreements is that the development of goodwill and the advertising effort is made,

in most of the cases, by the franchisor, as opposed to trademarks licensing

agreements. Franchises in developing countries are mostly concentrated in the

services field, like car rentaI, recreation, restaurants and hotels.

A report by UNCf AD249 identified abusive practices in the context of

franchise agreements in developing countries. This study reveals that royalty

payments are likely to be more frequent and probably higher than in the usual

trademark license agreement. Franchisors argue that they are conveying not only

their rights over the trademark and patented process, but also, and more

importantly, the international reputation and goodwill backing these rights. To

avoid the franchisee's competition, territorial restrictions are frequently included in

franchising agreements. Other restrictive practices Iikely to appear are tying

arrangements for purchase of inputs and equipment and control aver production

and distribution. Through these practices the franchisor is guarantt,eing the

quality of the goods produced under the franchise, as weil as maintaining goodwill

in the market. UNCf AD concedes that while nm a11 these terms will necessarily

represent predatory practice by franchisors, the weak bargaining position of

franchisees may help their occurrence.250

AlI the legal and commercial methods studied in the previous pages present

both advantages and disadvantages to the parties involved in the process of

international transfer of technology. As seen before, the circumstances, objectives

and needs of each party (whether the supplier or the acquirer) will determinc the

appropriateness of the method selected.

Licensing agreements can contribute effectively to the development of

indigenous technology provided they entait the manufacturing of goods in the

249 Supra, note 163 at 25


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licensee 's country and not only the mere importation of foreign trademarked

goods. A1though the negative effects of royalty payments on the balance of

payments cannot be eliminated altogether, they can at least be minimized through

carefully drafted agreements that take consideration of the developing country's

foreign exchange shortage as weil as their need to expand their exports

opportunities. It must be acknowledged, however, that the absolute conciliation of

interest between the parties will be almost impossible to reach owing to their

unequal bargaining power already mentioned.

Turn-key projects' main drawback is the acquirer's long term reliance on the

technology supplier, which contributes to the increasing dependence of developing

countries on foreign technology. On the other hand, it should be recognized that

turn-key proJecls are frequently a reasonable option for these countries

considering their lack of technological and manage rial skills mainly in least

developed countries. The best alternative for a developing country that chooses

the path of turn-key projects is the graduai unpackaging of the technology

transferred. In this way, the acquirer can participate more actively in ail the

stages of the project from setting up to the operation of the enterprise, thus

absorbing the supplier's technical knowledge and eventually adapting it ta the

local needs alld resources.

Joint ventures seem to be the most appropriate method for the transfer of

technology from the perspective of both the suppl: :Id the acquirer, since it

makes best use of the host country's local resourt h minimizing its foreign

exchange burden as weil as the supplier's capital ifl', .m",nt and expropriation

risks.

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mIRD CHAPTER

LATIN AMERICAN REGIMES FOR mE REGULATION OF TRANSFER OF

TECHNOLOGY: Focus on Mexico and the Andean Common Market

In their search for higher living standards, developing countries, and

amongst them Latin American countries, have recognized the crucml role that

technology plays in the generation of an industrial base on which to support their

fragile economies. At the same time, these countnes are aware of thelr need tn

resort to the importation of foreign technology, given their current inability to

satisfy the technological requirements involved in their economic and social

development programs.

Though clearly acknowledging this situation, leglslations enacted m vanous

Latm American countries in the mid-70's, concentrated on means to allevléltc the

numerous "side effects" resulting from this needed technological tlow, that are

manifested primarily in chronic balance of payments deficits and undue

dependence on foreign sources of technology. SpecIal attention is placcd on

"restrictive practices" frequentJy mcIuded in technology transfer agreements, in

particular, agreements that restrict exports and requin: excessive royalty payments

which adversely affect the balance of payments and hinder the development of

indigenous technology.

Most of the transfer of technology laws enacted dunng thls and subsequent

periods in Latin America, share common features. A primary objectIve is

controlling the adverse effects that the unrestricted inflow and outtlow of foreign

exchange exerts on the balance of payments. In order to carn foreign currency,

Latin American governments are focusing on the promotion of exports while

abandoning the import substitution policy that prevalled In preceding years.

Control over the outlay of foreign exchange is sought through the regulation of

payments (royalties and fees) for the technolobry acquired, particularly, in the

context of foreign parent enterprises and their subsidlanes. Additionally, these

75

legislations concentrate on increasing the bargaining power of local recipients vis à

vis foreign suppliers, a majority of which are multinational corporations.

Thi~ ch?~ter examines the regulation of transfer of technology in both

Mexico and the Andean Common Market (ANCOM) countries; it also identifies

the policies underlying these legislations in Jight of the particular characteristics

and goals of these countries.

1. MEXICAN POLICV TOWARDS mE TRANSFER OF TECHNOLOGY

A. BACKGROUND

An understanding of the evolution and the rationale behind Mexico's policy

concerning the acquisition of foreign technology would not be fulfilled without a

h;storica] overview of this country's attitude toward foreign investment in general.

For many years, the principal objective of severa] Mexican administrations

has been to raise the economic standard of its increasing population251 by

creating Job opportunities, mainly through a process of industrializatJon. The

achievement of a significant degree of techno]ogical modernization entails the

attraction of foreign capital and the acquisition of foreign technology. However,

the role that these two e]ements play in Mexico's developmental policy has been

surrounded by controversy. Mexican policy vis à vis foreign investment in

general and transfer of technology in particular, has been dominated by two

factors: on one hand, the need to upgrade the productivity and quality standards

of Mexican industries and the competitive advantage of Mexican products and, on

the other hand, a strong nationalistic ~entiment advocating for a minimization of

Mexico's dependence on foreign capital and technology as well as for Mexican

251 Mexico's total population increased by 100% between 1940 and 1965 and doubled again in the following twenty years. High population growth was the result of rapidly diminishing mortality rates (particularly infant mortality), as a con~equence of greatly improved sanitary conditions. At the end on 1987, Mexico's population was estimated at approximately 85 million refIecting a net annual increase of about 2.1 % (one of the highest in the world). CEPAL Review (ECLA - United Nations Economie Commission for Latin America and the Caribbean), No. 41, 1990, Chile.

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control over natural resources. Throughout the evolution of Mexico's economic

policy, the foeus has shifted from one side to the other.

76

At the time of the Mexican Revolution in 1910, the government headed hy

President Porfirio Diaz. had placed aIl the hopes for Mexico's economlc prmperity

on the inflow of forelgn investment. Accordingly, Mexican administrative and

legal machinery tacitly protected foreign Investor's mterests, hy not regulattng or

monitoring their activities in Mexican te-ritory. Furthermore, foreign mvcstors'

home governments frequently intervened in Mexican polltlcs on hehalt of thclr

nationals in arder ta "obtain and preserve the conditions mo~t propltlOU~ for the

maximization of profits with mInimal restnction on operatlons".252 The

protection of home governments on behalf of forcign mve~tors addcd a polttical

compone nt to the relationship and reinforced the already slgntflcant control

exercised by the latter over the economic situation of the country.

The Revolution's ide 'lis of equal distnhution of Income and socml Justice

reJected the traditional social and economic structures of the Mexican state and

revived a nationalistic feeling that would be the basis for their attItude toward

foreign investment in t le coming de:cades.253 The 1917 Constitution, a product

of the Revolution, was the first step toward this change in attitude; It hrought

about fundamental changes concerning foreign investment, by provlding for

252 Edward Epstein, "Introduction to Recent Developmenls in Mexicun Law: PoUtics of Modem Nutiollulism", 4 Den. J. of Int'l. L. & Pol'y., No. 1, 1974 at 2.

The eeonomic interest of the United States in Mexico, have heen substantial primarily due ta the geographü:al proxirnity of both countries. Accordingly, United States' intervention on Mexican politics was both shameful and frequent, in the beginning of the century. Mexican history gives shocking examples of United States' abuses of power, inc1uding the use of military force In several occasions: the intervention of Ambassador Henry Lane WIlson in a struggle over the Mcxican Presidency in 1913; President Wilson's sending of American naval and land forces to and occupation of Veracruz in 1914 with the purpose of oustmg Huerta who had assumed the Presidency the past year.

253 It is noteworthy that the Mexican Constitution of 1917 was the pioneer in the recognition of social rights and the introduction of provisions for thelr protection.

77

national control and ownership over mineraI resources. Firstly, the Constitution

granted ownership of ail subsurface mineraI deposits to the State and restricted

foreign ownership of land in border and coastal zones. Secondly, it attempted to

haIt the already mentioned foreign political intervention by requiring foreign

investors to renounce protection of their home governments.

The 1917 Constitution represents the first step for Mexlco's control over its

own resources and retlects a more cautious and skeptical attitude vis à vis foreign

investment. However, the translation of the Constitutional provisions into practice

was far from easy. As it was to be expected, foreign investors were openly

reluctant ta conform to the new rules of the game, since it meant giving up the

benefits and prerogatives obtained during Diaz's administration.254

The situation remained almost unchanged up until the Cârdenas

administration in 1939, when the tense cIimate resulted in a radical move by the

government: the expropriation of the oil industry.255 This action made cIear

the intention of Mexican authoritles ta subject foreign investors' activities to

Mexican Law and to take full control over national resources and economic

policies without the intervention of foreign interests.256

Dunng the 1940's and 1950's Mexico's government placcd priority on

254 See Schill, "The Mexican and Andean Investmelll Codes: An Overview and Comparison", 6 Law and Policy in International Business, 1974, at 441.

255 The reasons behind the status-quo were hoth externaJ and domestic. On one hand, the still vivid experiences of V.S. political and military intervention together with foreign investors threats to withdraw, were strong externally-generated pressures on the governments ta avoid an open confrontation with foreign interests. On the other hand, Mexican governments felt pressure building from inside their bord ers coming from domestic-interest-groups whose economic interest coincided with those of the forelgners and opposcd any attempt to upset the tradition al and unequal distribution of incorne if it meant weakening their well-entrenched economÎC power.

256 Schill makes the point that despite the reduction in foreign power in the are a of natural resources, other fields of the er..onomy were left virtually unregulated th us open to foreign investors, e.g. transportation, communications. Schil1, supra, note 254 at 442.

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industrialization257 as a way to achieve self-sufficiency in the domestic market

as weIl as to take part in international trade through exports. The growth

experienced by the Mexican economy during the se decades led foreign investors to

concentrate on the manufacturing and services sectors.258 At first, "Mexico had

created a modus vivendi with foreign investors,,;259 the latter \\Iere not

"frightened by the government regulations reserving certain aspects of the Mexican

economy to Mexicans only".260 By the mid-1950's the situation had changed

when Mexican businessmen began criticizing the unhindered entrance of foreign

firms to the manufacturing and services sectors, the most dynamic sectors of

Mexican economy at the time.261

The decade of the 1960's is characterized by the shaping of the

"Mexicanization" process, that is, the graduai increase of Mexican ownership and

control of the means of production and distribution, while increasing the

limitations on foreign participation in the economy.262

257 Since the end of the 1930's, Mexico mitiated a strate.6'Y toward industrialization based on import substitution. Between 1960 and 1975 the average rate of industrial growth went as high as 7.4 per cent per annum, as the result of the development of three sub-sectors of the manufacturing industries: non-durable consumer goods, intermediate goods, and durable consumer goods. R. Montavon. The Role of Multinational companies in Latin America: A Case Study in Mexico, (ECSIM, 1979), ix, pp.l13

258 D. Ronfeldt and M. Ortiz de Oppermann, "Mexicali Immigratioll, V.S. [nvestment, and U.S.- Mexican Re/atiom", The RAND Corporation and The Urban Institute Press, N ovember 1990 at 29.

259 Epstein, supra, note 252 at 3

260 Banco Nacional de Comercio Exterior, Mexico, 1966 at 181

261 Ibid

262 Baird, "l1le New Mexican Tramfer of Techn%gy Law", 12 De. J. Int'1. L. & Pol'y., 1982, pp.l07-120, fOùtnote 26 at 110. As a result of this polk)', new efforts were made to constrain foreign capital: the nationalization of the electnc power and sulphur industries, and the r.reation of joint ventures with majority Mexican capital.

79

During the decade of the 70's Mexico experienced acute economic

instability. A recent CEPAL Review confirms that up to the 1970's Mexico

enjoyed economic prosperity: between 1959 and 1970 the an nuaI rate of growth of

the GDP averaged 6.8%.263 However, from 1971 to 1975 the rate of economic

growth decreased to 5.6% and inflation grew at a 12.3% annual rate.264 Hy

September 1976 the Mexican currency suffered its first devaluation in two

decades.

Coinciding with the deteriorating economic situation, Mexican scientists and

intellectuals started to question their country's dependence on foreign capital and

technology and to criticize the absence of the basic conditions for domestic

research. The basic characteristics of Mexican industry in the 1970's were the

predominance of foreign capital in the dynamic branches, particularly in

intermediate and durable goods, with exception of steel and petrochemicals; the

extended use of capital-intensive technologies; and a high degree of dependence

on foreign technology.265 In 1972, the National Council of Science and

Technology announced that Mexico's weak technological infrastructure of research

was aggravatc!d by "the indiscriminate importation of technology".266 The

Council did not place ail the blame on the activities of transnational corporations.

Rather, it partiaJly attributed it to the absence of domestic support for research

and development.267

The declarations of the: Council came in the midst of a renewed

See Ronfeldt and Ortiz, supra, note 258 at 29.

263 CEP AL Review supra, note 251 at 31

264 Ibid

265 R. Montavon, supra, note 257 at 113

266 See G. Armstrong, "Dependencia Theory and Innovation in Mexico: The Dissolution of Property in Inventlve !deas", 19 Den. J. Int'I. L. & Pol 'y. at 119

267 Ibid

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nationalistic sentiment amongst Mexicans fearing a "foreign take-over of the most

profitable sectors of the Mexican industry".268 These concerns about

sovereignty were clearly reflected in the words of Bernardo Sepulveda, one of

Mexico's most influential analysts of foreign investment policy:

Fears exist about the alignment of the State's decisionmaking power, and the danger [exists1 of losing control of tht- basic ability ta direct the national interest... the expansion of the transnational corporation can me an the alienation of the national economy to foreigners, running the risk that, as a consequence of graduai infiltration~ a loss of independence will occur at sorne future moment.2()9

The need for a policy to promote the international tlow of technolob'Y and

foreign direct investment under conditions that best responded to Mexico's

national interests became evident. Echeverrfa's admimstration270 in 1972 was

instrumental in translating these policies into legislation in coordination with

policies on industry, finance and balance of payments.271 The government

268 See Epstein, supra, note 252 at 4. As thl -; article reveals, in 1970 foreign investment in manufacturing controlled 84% of the tobacco industry, 78% of chemicals, 68% of metal products, 54% of non-metallic minerai products. Ibid.

269 B. Sepulveda, "Polftica Indus/rial y Empresas TransnaciOlzales en Mexico", 1974. cited in supra, note 258 at 21. These fears were intensified by the fact that most of the foreign investment came from a neighbor that alsa happened to be the world's most powerful country. Ibid at 20.

270 Echeverria's administration capitalized on a renewed Mexican nationalism in order to foster economic development with social justice and incarne redistribution. "Let us remove economic cooperation from the realm of good will and root it in the field of law", were President Echeverria's words at the third UNCf AD Conference in Chile in 1972. Cited in E. Murphy Jr., Decision 24, Mexicaniza/ùm, and tlte New International Economie Or der: The Anatorny of Disincentive", 13 Texas Int'I L. J., 1978 at 299.

271 Support for this policy was not unanimous. As a report published under the auspices of the RAND Corporation and The Urban Institute asserts, many Mexican business and industrial leaders "were concerned that the Echeverria administration

developed an industrialization strategy conducive to the controlled and

discriminate transfer, assimilation, adaptation and generation of indigenous

tech nology. 272

As an essential step, the strategy called for the regulation of foreign

investment "in order to limit foreign ownership and managerial control over

MexJican resources and to shield Mexican industry from overpowering foreign

presence".273 Furthermore, the strategy sought the "progressive reorientation

of the demand for technology toward internaI sources to optimize the

development of indigenous design and engineering capabilities and capital goods

industries".274

81

Additionally, the strategy focused on the enhancement of the bargaining

leverage of national entrepreneurs vis à vis foreign suppliers and the elimination

of restrictive clauses from licensing contracts. These would be achieved through

the screening of the conditions under which technology was being acquired from

foreign sources, as weIl as through the development of institutional capabilities to

search internationally, evaluate, select, negotiate for, adapt, and generate new

technology.275

In an effort to deve]op a comprehensive set of laws that complied with the

objectives just mentioned, the Mexican government enacted a legislative "package"

in the ,early 70's aiming at: 1) the promotion of Me:dcan investment and the

would use the new law or the related law on technology to weaken the priva te sector and expand the state's role in the economy". Supra, note 258 footnote 3 at 30.

272 Baranson, North-South TechnologyTransfer, (Maryland: Lomond Publications Ltd., 1981), xi, pp.160 at 57.

273 J. Baranson, supra, note 272 at 57.

274 Ibid.

275 Ibid

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regulation of foreign investment;276 2) the regulation of transfer of teehnology

transactions;277 and 3) the regulation of the use and exploitation of inventions

and trademarks.278

82

Towards the end of the 70's, when these laws were in full effect, Mexico

experienced an economic boom as a result of worldwide rise in oil priees. The

revenues from oil exports, together with a la:-ge inflow of capital (80 billion dollars

in loans, payable from the projected oit revenues), resulted in very high levels of

investment, production, employment and social welfare,279 and in a wldespread

sense of confidence in the country's economic future. Mexico's steadfast eeonomic

growth created innumerable opportunities for foreign investors eager to enter into

this expanding market and get their share, notwithstanding legislative and

administrative control over their activities.

276 Law to Promote Mexican Investment and to Regulate Foreign Investment, Diario Oficial, Mar. 9, 1973; effective on 10 July 1973 (hereinafter Foreign Investment Law). Regulations to the Foreign Investment Law, issued on May 16, 1989, Diario Oficial May 17, 1989. For a study on the 1973 Law on Foreign lnvestment prior to the New Regulations see: Adolfo ArrioJa Vizcaino, ''The Law on Foreign Investme1ll", 7 Ga. J. Int'l & Comp. L., 1977, 33-40; Camp and Rojas Magnon, "Recent Developments Vllder the Mexicali Foreign Illvestment Law and the Law Regulating The Transfer of T~,)ma!..-)gy", 8 Lawyer of the Americas, 1976, No. 1, 1-35; Charles F. Schill, "The Mexicali and Andean Investme1ll Codes: An Overviewand Comparison", 6 1. of Law & Policy in Int'l Bus., 1974, 437-482.

277 Law for the Registration of the Transfer of Technulogy and the Use and Exploitation of Patents and Trademarks, Diario Oficial, Dec. 301 1972 (heremafter cited as the 1972 Technology Law), replaced by the Law for the COlllrol and Registration of the Transfer of Technology and the Use and ExploitatiOlI of Pate1lls and Trademarks, Diario Oficial, Jan. Il, 1982 (hereinafter cited as the 1982 Technolob'Y Law).

For a transcript of the 1972 Law see Technology Transfer: Laws and Practice in Latin America, B. Carl, ed., 1980, Appendix ;\-1. For an extract of the 1982 Technology Law, see Castel and deMestral, supra, note 105 at 747.

278 Law on Inventions and Trademarks, Diario Oficial, February 10, 1976. Amended on January 16, 1987; effective on January 17, 1987.

279 CEPAL supra, note 251 at 32

83

Although the focus of this chapter is on the 1982 Technology Law,

occasional reference will be made to the Foreign Investment and the Inventions

and Trademarks Laws, since they complement each other in defining the Mexican

policy towards the transfer of technology.

1. The 1972 Technology Law

The first effort to regulate specifically the transfer of technology process to

Mexico, materialized in the "Law for the Registration of the Tran,;fer of Technology

and the Use and Exploitation of Patents and Trademarks",280 that came into

force on December 30, 1972. This Law sought to adapt the industrial and

technological imperatives of development, to Mexico's distinctive social and

economic features, in particular, the fact that Mexico was already a semi

industrialized country when this legislation was enacted.

Mexican government's interest in regulating the transfer of foreign

technology was mainly based on the widespread fe\!ling that foreign suppliers were

in many cases taking advantage of Mexican recipients, first, by supplying

outmoded and inadequate technology at excessively high prices281 and second,

by imposing unjustified restrictions on the technology transfer agreements.282

One frequent complaint raised by Mexican manufacturers was that in many cases

the technolob'Y acquired was inappropriate since it had been designed for large

volume production in a country with high labor costs. The Mexican manufacturer

requiœd technology designed for small scale operations employing Mexico's

relativcly cheap labor.283 In addition, many Mexicans believed that through

280 Supra, note 277

281 Ronfeldt, supra, note 258 at 54

282 Baird, supra, note 262 at 109

283 Hyde and Ramirez de la Corte, MEXICO, in Technoloi,Y Transfer: Laws and Practice in Latin America, B Carl, (ed.), 1978, Chapter 1, pp. 1-54 at 2

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repatriation of profits, transfer payments for licensed technologies and services,

etc., foreign investors were taking out of the country much more than they were

putting into it, particularly, if their activities in Mexican territory were financed by

local resources rather than by new foreign capita1.284

The Registry

An innovation of the 1972 Technology Law -maintained in the actual

legislation- was the creation of the National Registry for Transfer of Technology

(hereinafter the Registry), under the Secretarfa de Comercio y Fomento

Industrial,285 the government's monitoring institution in charge uf assuring

compliance with the provisions of the law. The Secretary delegated to the

Registry and its Staff aIl administrative functions provided for in the Law.

Therefore, it was the Registry that had the upper hand in the evaluation uf the

transfer of technology agreements. The intervention of the Secretary in the

decision making processes has been infrequent,286

The Registry, acting through the Director and two Sub-Directors, examined

the agreements submitted for registration from a legal, economic and technical

perspective. The examination of the agreements from a legal perspective sought

ta attain compliance of the parties with the formai requirements set forth by the

law, in terms of the parties -individuals or legal persons- required to register the

agreements to which they were parties and the type of agreements subject to or

exempted from registration. The legal evaluation entailed as weIl, a primary

identification of those clauses of the agreement that could constitute a basis for

refusaI of registration.

284 Ronfeldt and Ortiz, supra, note 258 at 17

285 In 1977 the Registry was merged into the Foreign Investment Office.

286 See Hyde and Ramirez de la Corte, supra, note 283 at 8

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The technical evaluation aspired mainly to assess the appropriateness287

of the technology to be acquired, in terms of its availability in the dames tic

market, its labor vs capital content and the acquirer's absorptive capacity. In the

technical analysis the Registry performed an in-depth examination of those clauses

in the agreement having a restrictive or abusive character vis à vis the local

acquirer. This analysis was based on the gathering of information Dertaining other

available technology sources; comparative studies of processes and products; visits

to the companies; specialized technical information from data banks and

information services in the country and abroad288.

The economic evaluation of technology transfer agreements was based on

cost studies in other countries and financial analysis of the record of the acquiring

company;289 through this evaluation the Registry sought to estimate the long

term impact of the technology on bath the Mexican economy and the acquiring

company.

The Registry's intervention was ex post facto, that is, after the parties had

already initiated and frequently concluded the negotiations. Its participation as a

legal and regulatory instrument in the more difficult stages of the techno!ogy

transfer process (e.g. selection; adaptation of the technology ta the size of the

Mexican market) was practically non-existent.290 It must be noted however,

that the Registry encouraged applicants ta submit copies of the technology

agreements for informaI review prior to their formai filing for registration, in order

to identify at an early stage those clauses or conditions that might have been the

287 For a general analysis of the notion "appropriateness of technology" refer ta Chapter 1.

288 Baranson, supra, note 272 at 61.

289 Ibid at 61

290 Ibid at 62

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source of problems, misinterpretations and/or rejections.291

B. ANALYSIS OF mE 1982 TECHNOLOGY LAW

The 1972 Technolob'Y Law was replaced on February 10, 1982, by the Law

on the Control and Registratioll of the Trallsler of Techllology alld the Use and

Exploitation of Patents and Trademarks.292 The objectives of the Law, as stated

by Article 1, are the control and orientation of technology transfer agreement!> and

the development of internaI sources of technology. Mexican authorities aspire to

attain further control over technology transfer agreements having effects within

Mexican territory, by requiring their compulsory reglstration before the Registry.

The 1982 Technology Law contains 24 articles grouped mto t'ive chapters.

Chapter 1 entitled "General Provisions" inc1udes articles one through seven.

Chapter II, "Conceming the National Registry of the Tramfer of Teclllwlogy and

Registration Procedure", con tains articles eight through l'ourteen; Chapter III

entitled "Collceming Grounds for Deniai of Regis/ration", mcludes articles fiftecn,

sixteen and seventeen which are the core of the Law; Chapter IV, "COIlcemùlg

Sanctions" consists of articles eighteen to twenty-three and Chapter V, "CrJllceming

Appeal for ReversaI" contains only article twenty-four.

On January 9, 1990 the Secretary of Commerce and Industrial

Development announced the adoption of "New Regulations" to the 1982

Technology Law.293 These regulations do not constitute an amendment to the

291 Hyde and Ramirez de la Corte, supra, note 283 at 9. These authors assert that the informaI discussions frequently continued even after filing of the application for registration if it appeared that a denhI of registration was likely. Ibid

292 Supra, note 277

293 Reglamento de la Ley sobre el Control y Regi'îlro de la Tramferencia de Tecllologfa y el Uso y Explotaci61l de Patentes y Marcas, [hereinattcr New RegulatIOns] Diario Oficial, Mexico, D.P., Martes 9 de Enera de 1990.

The New Regulations were issued under the ample faculties granted to î.he Secretary by Article 9 of the Technology Law. In general terms, thi~ provi~ion

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Law; rather, they contain a detaited interpretation of the policies guiding the

Registry in its decision-making process.

1. Who must register?

87

As a general rule, the parties to technology transfer agreements that must

submit those to registration are: foreign individuals residing in Mexico, foreign

corporations and their branches established in Mexico, as weil as individuals or

corporations of Mexican nationality. The purpose of requiring the registration of

agreements concluded by Mexican nationals is to prevent foreign suppliers from

avoiding compliance with the law by presenting thenselves as national companies.

Additionally, the law requires decentralized agencies and State-owned companies

to register their technology transfer agreements.

The scope of the Law has been broadened to include registraI Ion of

agreements concluded by non-resident foreign suppliers and foreign corporations

not established in Mexico. Under the 1972 Technology Law registration of such

agreements was discretionary. Sin ce the Mexican Law could not have

extraterritorial effects, non-resident parties to transfer of technolo&'Y agreements

were not bound. Consequently, although the agreement had full effccts within

Mexican territory: the authorities were unable to regulate them unless the non

resident foreigner voluntarily submitted the agreement for registration. The 1982

law corrects this loophole by requiring non-resident foreign individuals and

corporations to register their agreements. This is a significant and controversial

innovation. On one hand, it assures control over ail technology transfer

agreements having effects in Mexican territory, notwithstanding the domicile of the

parties. On the other hand, it is considered by sorne authors as an extraterritorial

confers to the Secretary the right to determine th\! conditions under which the agreements will be granted or denied registration and to establish the basic policies regulating the transfer of technology in Mexico.

88

extension of Mexican Law,294 specially since the Law imposes sanctions on

these individuals and corporations who fail ta comply with this or other provisions,

as we will see later.

2. Agreements subject to Registration

The Law requires in its Article 2 the registration, before the National

Registry for the Transfer or Technology, of a1l agreements, contracts or other

documents whose purpose is transferring technology. It is only through

registration that these agreements will have iegal effects in Mexico.

The number of agreements that must be registered has increased from six

under the 1972 Law295 to thirteen under the new Law. Since the 1982 Law

sets out an exhaustive enumeration of the agreements subject ta registration there

should not be space for misinterpretations.

The innovations introduced in 1982 involve the registration of assignments

of patents and trademarks; certificat es of invention;296 the grant or


295 Article 2 of the 1972 Law on the Transfer of Technology provides: The registration in the Register .. .is obligatory fJr a11 document~ containing

acts, contracts or agreements of every nature which are effective in the National Territory and whkh have been entered into for the following purposes:

a) The licensing of the use or exploitation of trademarks. b) The licensing of the use or exploitation of patents for inventions,

improvements, indus trial models and drawings. c) The furnishing of technical information by plans, diagrams, models,

instruction sheets, instructions, formulas, specifications, formation and training of personnel or otherwise.

d) The supplying of basic or detailed engineering plans for the building of facilities or manufacture of products.

e) Technical assistance in whatever form it may be furnished, f) Services for the administration and operation of business enterprises.

296 The certificate of invention is an instrument created by the 1977 Law on Inventions and Trademarks. Under that law the owner of the certificate of invention was required to record at the Registry the agreement authorizing a third party to exploit the invention. Curiously, the 1972 Technology Law did not provide for it.

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authorization of the use of trade names; authorizatlOn of the use of copyrights that

involve industrial use; agreements relating ta computer programs; consulting and

supervisory services provided by foreign natural or juridical persons or their

subsidiaries, irrespective of their domicile.297

The Law provides exemptions from registration ta certain agreements,

depending on their temporary and/or indispensable nature. The agreements

exempted are: thcse allowing the admission into Mexico of fOleign technicians for

the installation of factories or machinery or for making repairs; agreements

relating ta the supply of designs, catalogues, and know-how which come with new

equipment and which are necessary for its installation; agreements providing for

assistance with emergency repairs; and, agreements relating to technkal training to

be provided ta employees. Additionally, the Law excludes from registration

international agreements for intergovernmental technical cooperation and

agreeClents for the exploitation of copyrights for artistic purposes.

The 1982 Law introduces, in 1ts article 4, a major change regardmg the

Maquiladoras or ln-bond industries.298 These industries -previously exempted

This incongruence has been corrected by the 1982 Technology Law by requiring thcir registration.

The certificate of invention does not grant the exclusive right to work the invention but il gives ta the inventor or his assignee the right to receive royalties. Any patentable invt'ntion may be protected by a certificate of invention instead ot a patent, according ta the 1987 amendment ta the Patent and Trademark Law. See J. Delgado, "Highlights to the Amendment to the Mexican Patent and Trademark Law", 15 International Business Lawyer, April 1987 at 180.

297 Agreements related ta technical assistance provided abroad by forelgners contracted by Mexicans (individuals or legal persans) are exempted from registmtlon as weIl as those with a duration of 6 months or less, which are required to be presented for the acknowledgment of the Registry. See New Regulations, supra, note 293, Articles 17 ta 19.

298 The in-bond or maquiladora industries were authorized by the Programa Nacional Fronterizo in 1965 with the primary objective of increasing Mexican employmen! in the are a of the US-Mexican border. The idea was to authorize the creation of assembly plants by United States manufacturers where there eXlsted an

90

from registration- are now subject to registration before the Registry. Prior to the

1982 Law, the in-bond industry was con~idered an activity isolated from the rest of

the economy and subJect to special rules. The inclusion of this industry within the

scope of the 1982 Technology Law can be seen as an attempt to make them part

of the global Mexican strategy towards industrial development and self-reliance.

From the perspective of the foreign entrepreneur the advantages of

Mexican maquiladoras c..re manifold: low cost of labor available (estimated to be

38% bdow the cost of overseas labor);299 labor productivity; proxirnity 0: the

U.S. market ta which virtually ail exp arts are destined; product quality and low

installation costs.

The substantial impact of the maquiladoras in Mexican economy is

evidenced mainly by two aspects: job generating capaci~OO and attraction of

foreign currency.301 However, their role in the effective transfer of technology

abundance of Jabor at ]ower costs, accessibility of tran:tportation, and the application of c~rtain United States Taxation laws. These plants were authorized to be 100% US-owned. The materials are shipped in-bond from the United States, processed in Mexico and returned to the United States or other exporting country. R. Radway, "Doillg Business in Mexico: A Practical Legal Analysis", 14 Int'I Lawyer, 1980 at 369-370.

For Iilore details about the Maquiladora industry and its impact in Mexican ~conomy see: H. Inman and A. Ortiz Tirado, ''A Mexican Dividend: Las Maquiladoras", International Lawyer, Vol. 9 No. 3, 19'15, 431-440; "La Industria Maquiladora: La favorece la divisi6n intemacional dei trabajo", Ban~o Nacional de México, S.A. (BANAMEX), Vol. LVII, No. 668, Julio 1981, 362-372; "In-Bond llldus/ry", Banco Nacional de México, S.A. (BANAMEX), Vol. LXVI, No. 778, Septiembre 1990, 454-461.

299 Mexico: Economie and Social Information, (Mexico: INEGI -National Institute of Statistics, Geographyand Informatics-, Septernber-December 1989) Vol. 1, No. 1, at 10

300 Labor employed in 1980 numbered 119,546 persans cornpared with 443,682 in August 1989. (Source: Ibid)

301 Foreign exchange generated grew from 1980 to 1988 at an annual rate of 14.9 percent, amounting to 1,456.6 million doUars i:a the Jan-June 1989 period, representmg 23 percent of the total value of manufactured exports. (Source: Ibid)

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process is disputable. As a Mexican government's publication admits, the in-hond

industry is working with a low content of domestic raw materials: during Jan

October 1989, 98.4% of aIl raw materials, containers and packaging m,'lterials used

by the in-bond plants were imported, with only 1.6% of domestlc oflgin:;~l2

This Iack or minimum integration of local inputs into the manufacturing

process -despite the fact that Mexico has a diversified industrial hase- is lirniting

the muItipIying effect that the industry could have in Mexico's economy,303 as

weIl as preventing an effectiv'~ transfer of technology to these type of industries.

It seems however, that the bé'1ef:ts derived from the operation of the

maquiladoras, in terms of employment and foreign currency generatlOn, outweigh

the negative effects. As will be s/!en later, the Law provides an "escape clause",

whereby under circumstances of particular interest to the country,·m4 the

authority can makc exceptions to the general rules for demal of registration. The

maquiladora industry c1early falls into t his exception.

3. Grounds for denial of Registration

The substance of the 1982 Technology Law is found in Articles 15 and 16

which set forth seventeen circumstances under which registration will be refused.

These circumstances are divided into two groups: thirteen conditions regarding

specifically restrictive or abusive business practices (Article 15);3D5 and four

302 Supra, note 299 at 14. The underlying reason for this situation is on one hand, that the decision making process as ta the pure hase of raw mate nais and other inputs is made in more than 50% of the in-bond plants by their headquarters ahroad; on the other band, mast plants consider that domestic raw materials are infenor in qUéllity, more expensive than the imported ones and difficult to obtain on a timely basis. Ibid at 13

303 Ibid at 13

304 See New Regulations, supra, note 320, Article 53

305 For general definitions and effects of these restrictive practices refer to Chapter l, supra.

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conditions of a more general nature regarding duration and cost of the technology

acquired, among others (Article 16).306

ft must be noted however, that the New Regulations make serious and

tangible efforts to enhance the protection of industrial and intellectual properry

rights mvolved in the technology tr:-.nsfer agreements. In general terms, the

Regulations agree to the registration of agreements involving restrictive practices

when necessary for the protection of industrial or intellectual propt:rty rights of

the supplier.

8. Analysis of Article 15:307 Restrictive practaces

(1) Supplier's intervention in the management of the acquiring enterprise

As a general ru le, contracts containing clauses allowins the supplier to

intervene directly or indirectly in the management of the acquiring company will

be denied registration, as prescribed by section 1 of Article 15. The rationale

for the denial of registration to these agreements is their contribution to increase

Mexico's dependence on foreign technology by preventing the utilization and

further generation of national managerial skills.308

306 The 1972 Law enumerated fourteen circumstances that would result in the refusai of registration. These were separated into two categories:

- those impediments that "per se" produced the automatic rejection by the Registry.

- those impediments for which exceptions could be granted on the di~cretion of the Registry.

307 Throughout the analysis of article 15 frequent reference will be made to the New Regulations with the purpose of setting for th the more relevant considerations gUlding the Registry ip the application of the Law and providing sorne degree of certainty 10 the parties involved in the technology transfer process.

For statistics on the reasons for rejection of agreements submitted ta the Registry from February 1973 to December 1977, see Table 1, infra.

308 J. Alvarez Soberanis, "Legal Aspects COllceming The Technology Transfer Process in Mexico", 7 Ga. J. Int'l. & Comp. L., 1977 at 24

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A supplier's intervention in the management of the acquiring enterprise will

be allowed on a temporary basis, when a management agreement is estahlis.hed to

assure more efficient operations by the recipient; when trademarks are involved

and the services are aimed at mainta~!1!!1g suitahle quality standard:.; and goodwill

and, when the agreement allows the provider to reVlew the reclpient's accounting

records for the sole purpose of verifying payment of agreed royalties, pwviùed this

do es not involve permanent control of the recipient's accounting.30<)

(2) Grant-back clauses

Section II denies registration to any agreement imposing on the acquin!r

the obligation to assign or license to the supplier -on its expiry, rescission or

assignment to a third party- the patents, trademarks, innovations or improvcmcnts

deve!oped by the former dunng the lifetime of the contract.'l0 Additionally,

the law denies registration to those agreements that do not contemplate the

reciprocal ex~hange of information C'oncernmg improvements or innovation~

developed by either party,311 However. where there is reciproclty or henefit

for the recipient in the exchange of information, registrawm is granted. A-;

established by the New Regulations, (Article 35) it is deemed beneficial for the

recipient when a preferential right is granted to the licensor pursuant to which he

will negotiate any impro\'ements developed by the licensee on the sa me conditions

as those cffered by third parties.

(3) Re.~earch and Development Restrictions

309 See Hyde and Ramirez de la Corte, supra, note 283 at 26.

310 Article 15, section II. For general information regarding grant-back provisions, refer ta Chapter 1.

311 Reciprocity is determined in respect of the territory, the degree of t!xclusivity and payments related to the improvements or innovations. See: UNCf AD, supra, note 72 at 29.

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A~ a general ru le, Section III renders ineligible for registration those

arrangements imposing on the acquirer limitations on the generation of local

Research and Development. The New Regulations broaden the scope of

application of this general stipulation by providing a detailed enumeration of

potentiaJ restrictiol1s on R&D.312 The regulations restrict any attempt ta

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deny or Iimit the reciplent's right to undertake its own R&D programs for the

innovation (Ir Improvement of produets, processes or equipment, during the

Iifetime of the agreement or after its expiration; prohibited as weil, are

agreements limitmg or conditioning, in an unjustified manner, the incorporation of

improvements developed by the acquirer into produets not covered by the

licensing agreement. Additionally, clauses (;onditioning the incorporation of

improvements obtained from third parties and Iimiting the field of use of potential

information, will be rejected.

The Registry will allow the inclusion of restrictions on R&D when

necessary to prote ct intellectual or industrial property rights of the licensor or, to

maintain the secrecy or confidentiality of the technieal knowledge used by the

recipient to develop such innovations or improvements.313

(4) Tied purchases

Section IV refers to the inclusion of clauses requiring the aCG irer to

purchase equipment, tools, parts or raw mate rials from a specifie source

exclusively and at a priee determined by the supplier. The scope of application of

this provision is limited to those agreements that do not take into account the

existence of alternative sources of supply. Where such alternative sources can be

found -either domestically or internationally- the provision will be activated,

312 See New Regulations, supra, note 293 article 36. As a complement see also the commentaries of Hyde and Ramirez de la Corte, supra, note 283 at 13 and UNCT AD, supra, note 72 at 25 .

313 See New Regulations, supra, note 293 article 37

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resulting in the denial of registration.314 In this way, Mexican authorities seek

to maintain the relative advantage of Mexican ex ports in the international market

by controlling possible overpricmg of gùods bl' the ~upplkr or Its designatcd

source of supply.315

The New Regulations make no objection 10 the inclUSIon of tle-m clauses

where no economic detriment is created to the hcensee, that llo, when the supplier

provides the goods at internationally competitive priees and quality standardlo or

where the purchase of inputs represents financial savings for the recipient. The

law takes steps to prote ct existing industrial property rights, hy allowing the

inclusion of tie-in clauses where the purpose is controlhng and mamtaming the

quality and goodwill of trademarked products. TIc-in déluses are aiso allowed

where a tangible risk exists of màirectly disclosmg supplier's confidentml techntcal

information if inputs are acquired from not designated sources.116

(5) Export Restrictions

Section V prohibits the inclusion of clauses limiting or forhidding exports ot

the acquirer's products. Mexican authorities consider export restrictIOns the mo~t

prevalent and potential1y damaging restrictive commercial practice implerncnted

through the technology transfer process,317 given their negative effects over the

balance of payments. The New RegulatIOns provide an emhraclng

enumeration of purported export restrictions, including the followmg: agreements

314 See New Regulations, supra, note 293 Article 38, Uncier the 1972 Law any agreement containing a tie-in clause was automatically denied registration; no consideration was given to a possible lack or inexistence of alternative sources. The 1982 Law follows a more flexible approach since it takes mto account possible shortages or 1ack of raw mate rials, spare parts etc. In the Mexican market.

315 Alvarez Soberams, supra, note 308 at 24

316 New Regulations, supra, note 293, article 38.

317 Hyde and Ramirez de la Corte, supra, note 283 at 14

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absolutely prohibiting exportation of products to a specified geographic area,

unless the supplier has previously granted exclusive rights to third parties or the

supplier has reserved the area for his own exclusive sales activities; agreements

limiting the volume of exports or rcquiring the ~uppller's previolls authorization to

export. AddItionally, the regulations prohibit agreements forcing the recipient to

ex port exc1usively through the supplier, except when the licensor is capable of

marketing the products more favorably than the Iicensee.318

(6) Use of complementary technology

According to the regulél.tions, clauses restricting the use of complementary

technolo!,'Y are those prohibiting the use of third-parties know-how in the

manufacture of products not incIuded in the licensing agreement, and those

preventing the manufacture of products different from those covered by the

contract that may enlarge or supplement the licensee's production lines.319

The prohibition of such clauses is motivated, according to Mexican

authorities, by the need to prote ct and encourage the free choice of the licensee

as to alternative sources of know-how to make possible the diversification of

domestic production.320 It is noteworthy, however, that the policy of the

Reglstry regarding the use of complementary technology ha'i been relaxed by the

new regulations. They expand the ability of a licensor ta place restrictions on the

use of third-party technologies by the licensee on products similar to those subject

to the licensing agreement, when the purpose of the restriction is ta prevent the

disclosurc of confidential technical information to third parties or ta protect the

318 See New Regulations, supra, note 293 articles 40 and 41. See aIso, UNCfAD, supra, note 72 a t 46.


320 Alvarez Soberanis, supra, note 308 at 24.

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prestige or image of a licensed trademark.321

(7) Exclusive .~ales agreements

The Law prevents registration of any agreement imposing on the acquirer

the obligation ta sell the manufactured products to one customer exc1usively

(section VII) or to the supplier (sectIOn X), and at the pnce flxed hy the ~upplier.

The regulatlons mtroduce an exceptIon when the ft'strIctlon IS hmitcd to a specIfIe

market and the licensor demonstrates that he -or the person hy him dcsignatcd

has an adequate distrIbution system or enJoys sufficient commercléli prestige to

carry out the marketmg of the products subJcct to the contract more eftïclently

than the licensee enterprise.322

(8) Personnel designated by the Supplier

Section VIII precludes the registration of any agreement requiring the

recipient to use, permanently, personnel Jesignatcd by the supplier. The inclUSIon

of this prohibition in both the 1972 and the 1982 Laws owes to the interest of

Mexican authorities to strengthen the country's scientlfIc and technologlcal

structure by promoting the use of Mexican labor force. E)~ceptlOns will he granted

when the availability of qualified personnel is scarce or mm-exIstent, provided that

the supplier commits hlmself to train Mexican technidans to replace the staff hy

him designated.323

According to Mexican authorities, this prOVIsion acts a~ a "legal precaution"

meant to prevent :;uppliers of technology from violating the provIsions of Idbor

and immi~ration laws, especmlly with respect to the obligatIon of prepanng

321 New Regulations, article 42. See also A. Guttt:rman, "Changillg Trend" in the Content and Purpose of Mexico's Illlellectual Property Right Regime", 20 Ga. J. Int'I & Comp. L., 1990 at 534.

322 See New Regulations, Article 43. See also, Gutterman, supra, note 321 at 535


Mexican technicians to replace foreign ones.324

(9) Sale or resale priees and limitation of production volumes

Section IX of Article 15 precJudes the imposition of limits on production

volumes and/or the imposition of sale or resale priees on goods destined for

domestic con~umption or exports. IncJuded In this section are those agreements

requirmg the reclpient to cease manufactunng the products incJuded in the

agreement or using the licensed technology, at the expiration of the agreement,

unless the terminatlon of the agreement b caused by default attributable to the

Iicensee.325

98

On the t'Irst case -limits of production volumes- the reclpient could be

reqUired elthcr to keep production at a minimum or to reach pre-fixed levels

within a pre-estlmated period of time. Both conditions cOüld inhibit the growth of

the acqUirer's enterprIse, especially in the Initial stages, by preventing it from

reaching full productIOn capacity or by demandmg excessive production levels.

The problem IS aggravated when the termination of the agreement is the

consequence of not reachmg those pre-determined goals.326

The Imposition of sale and resale priees on itemr, manufactured by the

acquirer has negative effects as weil, since these priees not always reflect local

market conditions (e.g whether the products are labor or capital-intensive).

The Regulations permit the inclusion of production or priee limitations,

324 Alvarez Soberanis, supra, note 308 at 25. Mexican Labor law provides that at least 90% of the employee:; of a company

must be Mexican citizens. Executive personnel is generally excluded from the calculation of this percentage. N otwithstanding laboT and immigration restrictions, when justifiable need for a foreign specialist or exeeutive can be demonstrated to immigration officiais, the necessary work permit and immigration visa are usually granted.

325 New Regulations, article 44


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where the technology is protected by industrial property rights existing at the time

of termination of the agreement, and when deahng with an exclusive licensc.~27

The following sections -XI, XII and XIII- are ail innovations introduced hy the

1982 Law. Neverth~less, they COdlfy existing Registry policy.

(10) Confidential character of the technology .... ·upplietl

Section XI of ArtIcle 15 deals with those agreements requiring the acquirer

to maintain the technical information supplied in secrecy, heyond the expiration of

the contract. Under the 1972 Law, the Registry viewed the transfer of

technology as a sale-purchase agreement, rather th,lO as a license.:nx The

recipient acquired unrestricted use of the technolobry suhJect only to pre-existing

industrial property rights. Consequently, the licensee was ah\t' to keep lIsing and

exploiting the technology after the expiratIon of the agreement.~29

The New Regulations allow the Iicensor to IITipO~e conftdentmhty provisIons

when the agreement has been amended ta mtrodllce hcensor's Improvements in

the transferred technology which enhance the production, quality and

competitiveness of the products produced under the agreement. In this case, the

confidentiality or secrecy clause will not exceed ten years heginning at the dat~~ of

celebration of the amendment.330

Confidentiahty restrictions extending beyond the term of the agreement

may also be impose d, when the transferred technology is protected hyexlsting

intellectual property rights and where there is a tangible risk ot dlsclosing technical

327 New Regulations, Article 45

328 H. Camp and C. ROjas Magnon [hereinafter Camp and Magnon], "Recent Developments Under the Mexican Foreign /nvestment Law and the Law Regulating the Transfer of Technology", 8 Lawyer of the Americas, No. 1, 1976, ]-35 at ]6.

329 Baird, supra, note 262 at 117.

330 New Regulations, article 46, section III

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knowledge ta third parties.331

(11) Infringement of the industrilll property nghts of third parties

The Law prohibits the inclusion of clauses whereby the supplier limits or

do es not expressly accepts his responsibility for the transgression of third parties'

industrial property rights. The New regulations allow the se clauses when the

supplier undertakes ta share the costs of any judicial procedure deriving from the

infringement of third parties rights, as well as ta furnish all the 1ssistance and

documentation necessary.332 The Registry makes an additional exception to

this general rule, when the supplIer presents pro of of Registration in Mexico of

the industrial or intellectual property rigltts involved in the agreement.333

(12) Lack of g"aranûe by the supplier of the quality and results of the

transferred technology

Section XIII o~ the Law places restrictions on the licensor's ability to limit

its respo '1sibilities with respect ta the quality and results of the transferred

technology. The tec.hnology transfer agreement may not conta in any clause that

eliminates the responsibility of the supplier for defects in the transferred

technology and for the damages ther~from resulting; for the licensee's inability to

manufacture goods using the transferred technology; and for structural or

functional errors in industrial plants built or developed under the licensing

agreement, when such errors are attributable ta defective technical

information.334

331 New Regulations, article 46, sections l, II, IV. See aIso, Gutterman, supra, note 321 at 535

332

333

33J

New Regulations, Article 47, Section III.

New Regulations, Article 47, section II.

New Regulations, Article 48.

1 101

The New Regulations provide a limited exception from the rcquiremcnt of

quality and results guarantee where the agreement establishes that the supplier

will not be liable for damages and irregularities resulting from the acquirer's own

failure to follow the licensor's technical instructions and, where no royalties or

other payments are to be made under the agreement.335

b. Analysis of Article 16

(l) Technology already available in Mexico

Section 1 of Article 16 denies registration to those agreements whose

subject matter is the transfer of technology aiready available in Mexico. The

Registry furnishes national technology suppliers with the opportunity to oppose

the registration of any agreement, provided they present sufficient evidence of

their capacity to supply similar technology under the sa me conditions as the

foreign supplier and that the technology offered has been effectively applied at an

industrial scale.336 Registry's practice shows that a specifie technology is

deemed to be available in Mexico when the agreement involves the licensing of a

patent which is invalid or has expired, and when it involves know-how which has

passed into public domain or which the recipient or a local resean,h institute is in

a position to develop under comparable circumstances and without any additional

cost.337

(2) Consideration payable

The payment clause is one of the most crucial of the whole transfer of

technology process and, as statistics of the Registry reveal, the most frequent

335 New Regulations, Article 49. See also Gutterman, supra, note 321 at 530

336 New Regulations, Article 50.

337 Hyde and Ramirez de la Corte, supra, note 283 at 11-12

" i 102

reason for rejection.338 When the amount payable is out of proportion to the

acquired technoJogy or constitutes an un justifiable or excessive bu rd en for the

national economy or for the acquiring company, the Registry will deny registration

of the agreement, according to section II of Article 16.

As admitted by the Registry, it is not possible to establish general rules that

will permit the definition of what constitutes an adequate payment. Consequently,

the Registry pC'rforms a careful and detailed case-by-case evaluation from the

technical-economic point of view, to determine whether the payments to be made

are in relation to the technical knowledge or the technology to be acquired, or if

they constitute a justified charge for the national economy.339

To achieve an effective CaSe by case evaluation, the Registry follows a strict

and comprehensive criteria,340 taking into consideration the nature of the

technology, the alternative sources of technology, the capital relationship between

the contracting parties, the economic situation of the receiving company, and the

existence of other unjustified charges in the agreement. These criteria deserve a

338 From February 1973 to December 1977, rejections for violation of Section II of Article 7 (which corresponds to Section II of Article 16 under the 1982 Technology Law) amounted to 85.11 % of aIl contracts rejected, that is, 1710 contracts of a total of 2009 negative decisions. Source: Alvarez Soberanis, supra, note 158 at 719-720. See Table 1, infra.

339 Camp and Magnon, supra, note 328 at 17. The Registry has, however, developed a sector by sector i0yalties-fJuctuation-rate:

- Pharmaceuticals - Light engIneering and vehic1es - Electronics - Food processing - Telecommunications

Ibid.

6% ta 10% of sales 2.5% to 5% of sales

4.5% ta 5% of sales 1 % to 3% of sales

5% of sales

340 These criteria gathered and published by Hope Camp and Clarence J. Mann, received the approval of Lie. Jaime Alvarez Soberanis, then National Director of the Registry. See H. Camp and CJ. Mann, [hereinafter Camp and Mann] "Regulating tlte Transfer of Techllology: n,e Mexicall Experiellce", 10 Columbia J. World Business, 1975, 110 at 112-114.

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close examination.

Nature of the technology

As Camp and Mann suggest, the crucial factors to be evaluated arc the age

of the technology and its life expectancy together with its contribution to ex ports

and the development of local R&D.341 In this sense, the Registry willlikely ask

for lower payments when a case for substantial increases in the productivity of the

user could not be made and when the technology tends nnly to produce market

growth for the user, rather than sreater profits.342

Alternative sources of technology

In arder to determine the priee being charged by aiternative foreign

sources of technology and the availability of similar technolob'Y domestically, the

Registry performs a comparative evaluation of the conditions included in similar

transfer of technology contract:; concluded bath in Mexico and abroad.343

Capital relationship between the supplier and the acquirer

The policy followed by the Registf'j in this context is based on two

parameters: the consistent application of the "most favored Iicensee" principle,

which in general terms implies that the technology should be supplied under terms

not less favorable ta the recipient than those offered to other hcensees of the

supplier in third countries,344 and the reduction of royalties where supplier and

acquirer are involved in a parent-subsidiary relationship.

In the context of trademark licensing, the Registry's viewpoint is that in the

341 Ibid

342 Camp and Magnan, supra, note 328 at 18.

343 Ibid

344 See Hyde and Ramirez de la Corte, supra, note 283 at 25

presence uf wholly-owned subsidiaries the use of a trademark should be free of

charge.345 Outside this context, the Registry strongly recommends that the

royalty payment should not exceed 1 % of net product sales.346

Economie situatwn of the acquiring company

104

In assessing the economic situation of the recelving company vis à vis the

payment for foreign technology, the Registry takes into consideration no~ only the

contribution of the technology to the overaJl performance of thf' recipient but also

the recipient's ;:lbsorptive capa city that i", the ability of the enterprise ta use the

techno~ogy supplied in an economically and socially efff!ctive way. This la st

aspect is one of the most important concerning the determination of adequate

payment and yet, the most difficult ta apply. As explained by Barbara

Hansen,347 the absorptive capacity of the receiver that is, the inducement of

technical progress on the basis of a transferred technology, involves three

interrelated aspects:

the capacity to recognize chances of adaptation of advanced foreign technology;

the capacity to adapt technology to the physical, social and economic context, and

the capacity to adapt social and economic conditions ta the requisites of the

technology.348

345 Alvarez Soberanis, supra, note 219 at 721. This author admits that the high number of con tracts involving no charge is the result of bath the pressure exerted by the Registry and the strong interest of foreign trademark holders in entering the growing Mexican market.

346 A study by Alvarez Soberanis showed that from a total of 6050 contracts submitted for registration up to 1975, the contracts involving the use of foreign trademarks amounted to 2923 that is, 48.3%, out of which 1609 (26.6%) referred exclusively to the use of trademarks. Ibid. See Table 1, infra.

347 Hansen, supra, note 62 at 431

348 Ibid

1 105

Unjusti.fied burdens on the recipient

This factor deals with the overall prevention of restrictive and/or ahusive

practices being imposed on the acquirer. Besides the restrictive practices already

studied while analyzing Article 15, the Registry watches very c10sely some practiccs

that may involve abuses, such as requiring the recipient to absorh taxes for which

the supplier cannot ob tain a deduction or credit; per diem charges for the services

of the provider's technical personnel and their livmg expenses allowance whlle

residing in Mexico. Since these charges could be intlated, it is the view of tht!

Registry, that they be included in the percentage royalty.349

AlI these standards followed by Mexicap authorities render very difficult the

selection of an adequate method to calculate royalties and fees. Although the net

sales method is generally accepted, the Registry is unconvinced that sales alone

reflect the value of the technology to the user.350 The Registry will approve

percentage of sales royalties "after comparing the cost with competing

technologies and adding a strong social benefit flavorillg".351

(3) Excessive duration of the agreement

Agreements whose duration term exceeds 10 years will not be granted

registration, pursuant to article 16 section III. In estimating the appropriate

duration of an agreement the Registry's main criteria is the effective transfer and

assimilation of the technology. A contra ct who se duratlOn is more than that

necessary for the effective conveyance of the technolo!,'Y -eventhough the

stipulated term is less than the maximum ten years- will be refused.352

349

350

351

352

Hyde ~nd Ramirez de la Corte, supra, note 283 at 26.

Camp and Magnon, supra, note 328 at 19.

Ibid. (emphasis added)

Hyde and Ramirez de la Corte, supra, note 283 at 16.

106

The iss ue of the duration of the eontract is direetly linked to the adequacy

of the payment clause and ta the confidentiality of the technology supplied after

the expiration of the agreement. In regard ta the reasonableness of the payment,

Soberams ackno vledges that eontracts with an excessive time limit imply higher

rate of royalties In relation ta the total amount paid; this in mm, results in a

burden both on the user and on the national ecanomy.353

One of the major concerns of the supplier is whether the recipient ,-;an be

required to treat proprietary information of the provider as confidential after the

technology agreement has expired. It is the view of the Registry -as already

mentioned in Section XI of Article 15- that the recipient acquîres unrestricted use

of the technology after the termination of the agreement, unless industrial

property rights' protection exceeds the length of validity of the technology transfer

agreement.354 On the contraI y case -where the intellectual or industrial

property rights involved expire prior to the date of termination of the technology

transfer agreernent- registration will be denied.355

In the light of these concerns, the Regulations provide a suitable solution,

allowing the supplier to include the tet;hnological innovations or improvements

developed after the agreement has already been in effeet for a period of time, in

an amendment ta the original contract. Thus, a new 10 year duration period will

start running for that new technology from the date the amendment enters into

353 Alvarez Soberanis, supra, note 158 at 719. This author's study ~hows that excessive length of validity is a trequent basis for rejection of registration, amounting ta 38.32% of aIl the negative decisions from 1 February 1973 to 16 December 1977. See Table 1, infra.

354 Foreign suppliers consider this policy as a substantial disincentive to supply the most modern technology. During the last portion of the life of the agreement a deliberate slowdown in the process of transfer of technology is frequently observe d, specially in the <;ase of patents which are issued for a non-extendable period of 14 years. (The 1976 Patepts and Inventions Law originally set out a duration period of 10 years. It was reforrned in 1987 ta the actual 14 years).

355 New Regulations, Article 51

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force.356 This will prevent the supplier from s)owing down the flow of new

technical information when the expiration date is approaching.

(4) Dispute Resolution

The last section of Article 16, section IV, dea)s with the choice of forum

and of the applicable law in the possibility of a litigation process.357 The

generai tenet set forth by this provision is the denial of reglstratlon to any

agreement submitting its interpretation or performance to foreign courts.

Exception is made where the agreement express)y submits the controversy to

international arbitration, provided substantive Mexican law is applied and the

arbitration is conducted in accordance with applicable international agreements

ratified by Mexico.358

c. Legal Recourses against Resolutions denying Registration

The negative decision of registration issued by the Registry may be

challenged by those who consider themselves affected. Article 13 of the Law

makes available to the allegedly prejudiced party the mechanism of

107

Reconsideration. Under this procedure, the individual has the right to appear

before the responsible national authority (in this case the Registry), to request it

356 New Regulations, Article 46 section III. See also Hyde and Ramirez de la Corte, supra, note 283 at 19

357 It is noteworthy that the Registry has no authority to issue any decision with respect to the compliance of the parties with the terms of the agreement. Accordingly, registration may only be canceled pursuant a valid court order. New Regulations, Artide 14.

358 Especially pertinent in this matter is the UN Convention on the Recognition and Enforcement of Foreign Arbitration Awards (New York Convention) of 1958, which Mexico has ratified. The Registry encourages submission to the Inter American Arbitration Commission.

ta "reconsider" its decision.359 As expressed by Alvarez Soberanis, this

mechanism "responds to the necessity that exists for individuals ta have lega~

means ta defend themselves against arbitrary actions by me administrative

authority".360

108

The petition for reconsideration must include reference to supporting

evidence.361 The Registry will have 90 business days ta thoroughly examine the

evidence and issue a decision.362 The reconsideration by the Registry can

result in a Confinnatory decision, whereby the administrative authority maintains

the original decision; a Modifying decision or, a Revocatory decision, whereby the

Registry, recognizing that the individual is correct, amends its decision and permits

the registration.363

Once the Registry has rendered its decision, the administrative route is

used up. If the decision was a Confirmation or Modification, the prejudiced party

still has another way to challenge the decision, this time through the J udicial

system. The petitioner has the right ta tum to the Judicial Organ and file the

judicial recourse of Amparo de Garantfas Constitucionales, whereby the persan

359 The party has fifteen working days -after the effective date of notification of the resolution denying the registration- to make this plea.


361 The party has thirty working days (from the date the reconsideration plea was submitted) to effectively present this evidence to the Registry for its evaluation. The evidence might be of any type accepted by the law and cannat be against moral or public policy.

362 In Latin American Administrative Law there's a device called "silencio administrativo", under which the petition for reconsideration is d~emed ta be decided in favor of the petitioner if the administrative authority (the Registry in this case) does not render its decision within the established time period.

The Federal Code of Civil Procedure applies ta those parts of the process not specifically regulated by the Technology Law (e.g. roles regarding evaluation of evidence; determination of the effective date of notification of resolutions).

363 Alvarez Soberanis, supra, note 158 at 29-30

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injured by the administrative decision has recourse to the competent judicial

authority (and not ta an :ldministrative one) "for a definitive determination as to

whether the administrative decision m question is justly founded am .• sets torth

reasons that are in conformity with the law".364 This recourse can result m the

Revocation or Confirmation of the Administrative decision (the Rcgistry's decision

in our case). In the latter case (the confirmatIon) there IS one last rccourse

available to the individual, whlch can turn to the judicial authority hlerarchically

superior ta the District Judge -Tribunal Colegiado de Clrcuito en Materia

Administrativa- for a final decision; no further appeals are availahle.~65

d. Analysis of Article 17

Article 17 is an "escape clause", whereby the Secretaria de Comercio y

Fomenta Industrial -acting through the Registry- ,s allowed to grant exceptions tn

each and every one of the potentially restrictive clauses contamed in Articles 15

and 16. In this task, the Registry will be strictly guided hy the criteria devcloped

by Article 53 of the New Regulations.

As a general rule, Article 53 allows the registration of an agreement that

would otherwise violate a section of Article 15 or 10, when such agreement result~

in a benefit to the country. An agreement is considered beneficml for the country

when it generates permanent sources of employment and contnbutes to the

technical upgrading of human resources through the generation or furthering of

Research and Development activities, bath in production facilities and in national

364 Alvarez Soberanis, supra, note 158 at 30. The competent judicial authority according ta Mexico's Federal Code of Civil Procedure is a District Court.

365 The available data show that from a total of 2009 negative declslons I~~ued by the Registry between February 1, 1973 and December 16, 1977, a number of H05 pleas for reconsideration were presented. From 501 case!! processed at that time, 359 resulted in the revocation by the Registry of its previous negati\le decision, white in the 142 remaining cases the decision was confirmed. These negative!! decision have been triggered 45 "Amparo" proceedings. See Appendix 1, infra.

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research centers. Benefits to the coutry are also obtained when the agreement

opens access to new markets abroad and entails the manufacturing -in Mexican

territory- of new products, especially if it encourages import substitution and

improves the balance of payments situation. Additionally, the agreement is

ùeemeù heneficial to the country when the technologies involved do not result in

ecological deterioration.366

Prior to the issuance of the New Regulations in 1990, the determination of

what was beneficial for Mexico, greatly depended both on the type of technology

offered and the type of technology needed at any given moment of Mexico's

industrial development. The Registry exercised unlimited discret ion in this matter.

The New Regulations limit a great deal of this discretion and provide legal

certainty as to the outcome of the registratian process, by providing an

enumeration of the agreements which cou Id be exempted from compliance with

Articles 15 or 16.

Gutterman,367 on the other hand, affirms that the interpretation of

Article 53 of the New Regulations is still uncertam, therefore opening the

possibility for a licensing agreement ta be "nullified and all protections voided if

satisfactory proof of the existence of one of the specifie benefits 1S not

presented".368 Gutterman's interpretation seems ta suggest that eve.,though

the agreement does not include any of the grounds for refusai included in articles

15 or 16, registration could still be denied if the licensor is unable ta praye ta the

satisfaction of the Registry the existence of one of the specified benefits

enumerated in article 17. We do not believe this ta be the intention of the law

makers. At first blush. any agreement that falls into any of the cases prohibited

by Articles 15 or 16, will not be registered. If the licensor shows that the transfer

366

367

368

New Regulations, Article 53

Gutterman, supra, note 321 at 537.

Ibid

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of nis technology will benefit Mexico in any of the ways listed hy Article 53 of the

Regulations, it is very likely that he will get relief from the provisions of Articles

15 and 16 of the Law, despite the agreement's non-compliance with those articles.

e. Sanctions

Articles 18 to 23, provide for administrative sanctions (notwithstanding

other sanctions imposed by criminal courts) that may he imposed hy tht. Ministry

for furnishing false information in connection with an applicatIOn for registration;

failing ta register an agreement or amendmem WhlCh the Law reqUires to he

regist~red; refusing ta furnish pertinent information reque~ted hy the Reglstry.

Fines can be as large as the entire valu'.! of the bargam or up to ten thousand

times the daily minimum wage in the Federal District and apphed to Mexlcan

nation ais as weil as to foreigners.369 Article 24 grants the alleged transgre~sor

the right to have a heanng and ta appeal from the impOSItion of these sanctions.

Finally, Article 23 imposes on the employees of the Reglstry the oblIgation

to maintain the confidentiality of the information obtained hy way of thelr

position, subject ta a fine of up to five thousand times the daily minimum wage in

the Federal District and discharge from his post, without prejudice of the

applicable criminal sanctions.

C. EFFECT OF THE LAW ON THE FLOW OF TECHNOLOGY TO

MEXICO

The 1982 Technology Law was enacted in response to a nationalistic

sentiment nurtured by the optimistic prospects of the Mexican oil industry in t'le

369 Baird, supra, note 262 at 119 footnote 82. In determining the amount of the fine the Registry will take inta accaunt "the seriousness of the infraction, the goodfaith and the degree of invalvement of the transgressor in the illegal act, and whethe; fraud was involved". Ibid

f' , -"

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late seventies and early eighties. We agree with Baird,370 who states that the

government may have believed that, under these advantageous economic

circumstances, foreign investors would seek out the Mexican market despite the

enactment of a new and more restrictive law. Moreover, this author asserts that

the enactment of the 1982 Law was directly motivated by the success of the

originallaw.:nt As a result, the Mexican Government was encouraged "to try

ta drive an even harder bargain" for Mexican recipients and foreign suppliers of

technolohl)'.372

Thc 1982 Technology Law is considered more restrictive than its

predecessor, for a number of rcasons.373 First, because it increases both the

number of technology transfer agreements that must be rcgistered374 and the

number of basls for denial of registration.375 Second, becRolse it not only

requires Mexican natlOnals but also non-resident foreigners to register technology

transfer agreements ta which they are parties.376 And fin a Ily, because it

imposes substantial pecuniary sanctions for transgressions of its provisions to both

370 Sec Baird, supra, note 262, footnote 24 at 110 and accompanying text.

371 Corre a affirms that Mexico had one of the highest volumes of applications and registrations of technology transfer agreements of any Latin American country -including Brazil and Argentina- in the mid-1970's. See Corre a, supra, note 20 at 409. Hyde and Ramfrez de la Corte concede that the Old Technology Law had put Mexican reclpient!i in a better bargaining position, see Mexico's New Transfer of Technology and Foreign Investment Laws -Ta What Extent Have the Ru/es Changed?, 10 Int'I Law., 1976 at 251. Baird asserts that, as a result of the enactment of the 1972 Technology Law, Mexican recipients were receiving more suitable technology at lower cast and on more equitable terms. Baird, supra, note 262 at 110.


373

374

375

376

Ibid at 108

Compare 1982 Law, articles 2-3 with 1972 Law, article 2

Compare 1982 Law, article 15-17 with 1972 Law articles 7-8.

1982 Law, article 5 (new provision)

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Mexicans and foreigners.377

The stringent character of the 1982 Law has generated sorne concern

arnongst Mexican and foreign businessmen. Their main worry is whether this new

policy will hinder the transfer of technology process to Mexico, hy tllscouraging

foreign suppliers from entering mto this market.378 There IS no speclilc data

available ta determine whether the tlow of technology to MexIco has decreascd,

increased or remained constant during the operation of the Law. Moreovcr, wlth

regards ta this point, the opinions of the analysts differ considerahly.

Sorne authors who foresaw certain àecline in the f10w of technolo!,'Y,

considered however, that it "probably will not be sufflcient tn haIt or severely

retard Mexico's economic growth".379 This conviction finds support on the fact

that Mexico offers several appealing advantages to foreign investors: a stahle

politieal climate; cheap labor costs; an expanding market due hoth to its

demographic explosion and ta aggressive developmental policies, and a

technological base which has reached a point where, though it still needs foreign

technology flow, it is no longer totally dependent on it.380

Along similar lines, one analyst of the immediate effects of the Foreign

377 1982 Law articles 18-23 (aIl new material)

378 On the other hand, it has been stated that the 1982 Law did not cftcet major silbstantial changes, rather, it incorporated and reflected admmistratlvc interpretations and procedures resulting from nearly a decade of experienee undcr the 1972 Law. The supporters of this view do not foresee any substantial decrcasc in the flow of foreign technology to Mexico. See A. Hyde, "1981 Mexicall Trall.\fer of Technology Law", 15 Lawyer of the Americas, 1983, 37-45 at 37.

379 BaIrd, supra, note 262 at 120.

380 This is specially notice able in the Mexican oil industry, where PEMEX (Petrôlcos Mexicanos), considered the largest and most dynamic of Mexico's state-owncd enterprises has become nearly self-sufficient in petroleum techno)ogy, proJcct engineering and equipment design. Furthermore, PEMEX has exported sorne of lb

own technologîcal processes ta countries including the United States. See Saranson, supra, note 272 at 74.

114

Investment and Transfer of Techuology Laws, adrnits that both laws "slowed down

investrnent ternporarily because new investors were not sure just what they rneant

and huw they would be applied".l81 The sarne author concedes however, that

while the growth of foreign investrnent has not been spectacular, the fact is that it

has not decreased; moreover, he predicts that it wilJ continue to grow at a more

significant pace, "within the framework of the new Law and the tradition al good

climate for foreign investment in Mexico".382

A ]990 study sponsored the RAND Corporation and the Urban

Institute383, acknowledges that it is difficult to attribute the increases and

decreases in the flows over time directIy to the law. As the study continues, the

law "is only one of the various factors investors take into account. Changes in

economical and political conditions in the country rernain more significant

explanatory factors than the legal situation".384 This view is shared by

Weinert,385 who asserts that "the most important determinants of capital flows

are not the presence or absence of restrictions Of, one might add, the presence or

absence of incentives".386 Rather, this author continues, "such fundamental

factors as size, resources, economic potential, and political stability far outweigh

the presence or absence of restrictiv1• nolicies, and on these scores Mexico has

381 George Blake, "Tlle CUmale for Foreign Investment in Mexico", cited in supra, note 258 at 44.

382 Ronfeldt and Ortiz, supra, note 258 at 44

383 Ibid

384 Ibid at 43

385 Richard Weinert, IIForeign Capital in Mexico", cited in supra, note 258 at 47, foot note 20 and accompanying text. This view is shared also by José 1. Casar, "Mexico's Policy on Foreign Investment ll

, in Riordan Roett (ed.), Mexico and the United Stated. Managing the Relationship, (Boulder, Colorado: Westview Press, 1988), p.46; George Blake, supra, note 381.

386 Ibid

1

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rated very high".387

Another aspect worth considering is that the effectiveness of any given law

not only depends on its substance but also on the way it is executed. An aspect in

which many authors agree, is that the Mexican Law on Transfer of Technology has

been efficiently administered by the competent authorities. In Baird's words,

"Mexico's Old Technology Law was very ably administered ... and there is no

reason to anticipate that the staff of the Register will not continue its history of

competent and fair administration".388 It is acknowledged that the Registry's

performance, as to the reduction of the incidence of restrictive practices in the

agreements registered, has been effective.389 Baranson concedes that the

Registry has had a positive effect on the production costs of sorne goods

manufactured under license; on the rationalization of imports of raw materials,

intermediate goods, and machinery and equipment by promoting the

diversification of suppliers; and on broadening export possibilities by eliminating

export prohibitions.390

387 Ibid

388 Baird, supra, note 262 at 120. Similar opinion has been expressed by Camp and Magnon, that described the Registry's staff as "hard working" and "experienced". Camp and Magnon, supra, note 328 at 8.

389 See Hyde and RamIrez de la Corte, supra, note 283 at 36-38. This authors identified a significant reduction in the incidence of export restrictions, R&D limitations~ tied purchasing requirements and limitations on the use of complementary technology.

390 Baranson, supra, note 272 at 63. Official projections have been made as to the savings to Mexlcan tïrms and to

Mexico's trade balance resulting from adjustment and renegotiation of technolob'Y agreements. Mexican authorities concede, however, that it is very difficult to come up with an exact figure as to the savings since they are based upon future sales projections in most cases. Hyde and Ramirez de la Corte, supra, note 2S3 at 3R

Notwithstanding, it has been stated by Registry's staff members that during the time the 1972 Law remained in effect (that is, almost ten years) Mexican firms were saved about $640,000,000 in royalty payments. This data was revealed by the Subdirector of Evaluation of the Registry in a June 1977 interview conducted by Hyde

..

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116

Statistics regarding FOI could, by analogy, help us estimate the aetual trend

of technology transfers to Mexico. Official data show a favorable trend of FOI

during 1983-1988 after a severe decline in 1982 due to the advent of the foreign

debt erisis. (See Table 2) The sharp decline in oil priees by mid·1981 led the

Mexican eeonomy into a severe criflls, charaeterized by "over-indebtedness,

extremely high fiscal and balance-of payments deficits".391 The eri'lis reached

its climax in 1982 when the government declared itself in moratoria, that is, unable

to meet its external debt obligations. Although the crisis remains, non-oil exports

are up, inflation is down392 and the annual FDI flows inereased from 683.7

million in 1983 to 3157.1 million in 1988.393

Mexieo's view towards foreign investment is changing. As a Mexican

analyst declares, foreign investment "is now viewed less in terms of the costs and

risks, and more in terms of the benefits to Mexieo's interests and needs".394

This "new nationalist mentality" considers foreign investment as an effective

instrument for penetrating foreign markets, for improving efficiency, and for

attracting and absorbing modern technology.395

The administration of President Salinas de Gortari has been instrumental in

shaping Mexico's new mentality towards technology transfer and foreign

and Ramlrez de la Corte. The figures were based on the assumption that the average technology agreement registered to date will remain in effect for ten years. Supra, note 283 at 38. See as well Baird, supra, note 262 at 109.

391 CEP AL, supra, note 251 at 20

392 FORTUNE, "Wiry Mexico is looking better?", January 15, 1990, 135-137.

393 Source: INEGI, supra, note 299 at 25

394 Rogelio Ramirez, "De la Improvisaci6n al Fracaso: La Polttica de la Inversion Extranjera en México", cited in supra, note 258 at 58, footnote 5 and accompanying text.

395 Ronfeldt and Ortiz, supra, note 258 at 58 footnote 6 and aecompanying text.

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investment, in partÎl.!ular. Although it is still not widespread,396 it is profoundly

affecting government poHey. The best example are the New Regulations on

Foreign Investment enacted on May 1989,397 which analysts consider a radical

change, not only in the administrative interpretation of the legislation but ét!so in

the policies and in the general attitude of the Mexican government towards

foreign investment.398

396 Accordmg to the study by the RAND Corporation and the Urban Instltute, "this new thinking started among the young generation of elites dealing with domestic and intern~tional economie poliey issues during the late 1970s and early 1980s." To date, "this transformation in nationalist thinking is centered in a small part of the ellte cIustered around President Salinas". Supra, note 258 at 60

397 The New Regulations became effective on May 17, 1989 (Diario OtJcial May 16, 1989). The reader must keep in mind that the Foreign Investment Law has not been amended, thereforc, the general rule of maximum 49% of foreign investmcnt in Mexican c0111panies remains in effect, except in the specml cases set forth hy the New Regulations.

For analysis and perspectives of the new foreign investment c1imate in Mexico, see: Hector Rojas, "New Foreign Investmelll Regulations of Mexico", 18 InCl Bus. Law., March 1990; BANAMEX, "New Regulations on Foreign lllveslmelll", Vol. LXV, No. 764, July 1989; Fernando Sânchez Ugarte, "Mexico's new foreign ùzvestmelll climale", 12 Houston Journal of International Law, 1990; David B. Hodgms, "Mexico '.\' 1989 foreign inveslmenl regulatio1lS: a significanl slep forward, but is il ellough?", 12 Houston Journal of International Law, 1990; Ignacio G6mez-Palacio, "The new regulaLiolls of foreign investmenl in Mt:Xico: a difficult task", 12 Houston Journal of International Law, 1990; John Knight, "Mexico redoubles effons to attract foreign franclzisors", 9 Franchise Law Journal, 1990; Claus von Wobeser and Kathleen Burguete, "New Mexican foreign investment regulations", ] 7 International Business Lawyer, Decc mber 1990; Jorge Camil, "Mexico's 1989 foreign investmelll regulatiol1s: tlte conzerstone of a new economic modef', 12 Houston Journal of International Law, FaU 1990.

398 Hector Rojas, "New Foreign Investment Regulations of Mexico", 18 Int'I Bus. Law., March 1990, at 135.

The New Regulations' main feature is allowing one-hundred percent direct foreign investment not requiring in the majority of cases the express authorization of the government, provided the investment is not included in the "Classification of Economie p.ctivities and Products", which reserves exploitation of certain areas exclusively to the State, Mexican nationals or limits it up to a 49% foreign owncrship. Other requiœments to be met are: the investment should be located outside areas which aIre ad) have a high concentration of industry (metropolitan arcas of the

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Even as we write, serious talks are on their way for the creation of a

tripartite Free Trade Agreement amongst Canada, the United States and Mexico.

This is perhaps a good evidence that Mexican economy is growing stronger and

opening up at a fast rate, founded on a diversified and highly competitive

industrial sector as weil as on the aggressive and consistent legislative initiatives,

particularly, of the past two decades.

II. ANDEAN COMMON MARKET'S POLICY TOWARDS mE TRANSFER

OF TECHNOLOGY

A. OVERVIEW: From LAFTA to Decision 220

The immediate antecedent of the Andean Common Markeè99 (ANCOM)

is found in the Latin American Free Trade Association (LAFf A) formed by aIl

ten South American countries and Mexico. Up to that moment, LAFT A

represented the first initiative in Latin America, geared tov/ards economic

cooperation and integration at a regional level. ANCOM is the result of the

economic nationalism existing in the Andean countries and the conviction that

through their economic integration, foreign investment would be effectively

Federal District, Guadalajara and Monterrey); creation of permant!nt jobs and training and personnel development programs; use of adequate technology and cf'mpliance with environmental legislation; the amounts to be invested in capital expenditures during the pre-operational period should not exceed the maximum amount established by the Secretary from time to time (to date it is $ US 100,000,000); fjnancial resources must be brought in from abroad either as capital contributions from shareholders; as loans from foreign entities, or obtained jn foreign money markets by Mexican financial institutions. See BANAMEX, "New Regulations Oll Foreign InvestmelU", Vol. LXV, No. 764, July 1989 at 289-290.

399 ANCOM was established on May 26, 1969 with the signing of the Cartagena Agreement (Acuerdo de Cartagena) in Colombia. The initial signatories were Peru, Ecuador, Bolivia, Chile and Colombia. Venezuela became member in February 1973, while Chile withdrew in 1976 after significant political changes .

ANCOM is technically and legally a subregional entity within the LAFT A framEwork, and its members are aIl members of LAFTA.

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directed toward the developrnent goals of the region.4OO The creation of

ANCOM was triggered by the obvious econornic and developrncntal disparitics

amongst LAFf A mernbers, specially vis à vis the so ca lied "Big Three" of Latin

America -Argentina, Brazil and Mexico-, that placed the Andean countries in a

disadvantageous bargaining position.401

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While seeking higher levels of industrial and econornic developrnent,

ANCOM acknowledged the need for foreign capital402 and technological

cooperation. However, the Andean countlÎes wanted and needed only such

technology that will not keep their technology "subservient and dependent on the

transferor nation".403 These objectives and needs are reflected in the first

400 A. LOpez Valdez, "The Andean Foreigll Investmelll Code: Ail Attalysi't", 7 J. of Int'l Law and Economies, No. 1, 1972, at 1-2.

401 An UNCTAD study conducted by Constantin Vaistos, reveals that by 1970, trade within LAFf A mernbers dernonstrated increasing deficits for the Andean Group as TNEs gravitated towards Argentina, Brazil and Mexico. For the period 1961-1968 the exports of the latter three countries to LAFTA increased by 192 per cent while the exports of the Andean Pact (excluding Venezuela) tn LAFTA increased by less th an 140 per cent. See Constantin Vaistos, 'flle mie of transllational en.rerprises in Latin American economic illlegratioll efforts: Who illlegrates, and witlz whom, how and for whose belle fit?, UNCT AD/ST /ECDC/19, January, 1983 at 84.

402 Unpublished documents oi the Junta deI Aeuerdo de Cartagena, estimated the total financial resourees needed ta fulfil ANCOM's econornie integration plan up to 1985, at about $29 billion. See Vaistos, supra, note 401 at 84

403 J. Mirabito, "The COlltrol of Technology Transfer: The Burke-Hartke Legislatioll and the Andean Foreign Investment Code: The MNE Faces the Nations", In1'l. Lawyer, Vol. 9, No.2, 1975, at 233.

In defining its policy towards technology transfer, ANCOM faeed a dilernma. While there was a need ta equalize the teehnological infrastructure of each country and adapt it to the regional infrastructure, the achievement of such degrees of teehnological and industrial developrnent could inerease the regions's dependence on foreign sources of technology this posing a direct threat to this sarne integration process.

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piece of legislation promulgated by ANCOM, Decision 24,404 also known as the

Andean Foreign Investment Code. In an unprecedented political act, Decision 24

established a common treatment for foreign investment, technology transfer and

other related matters, and consequently, became the cornerstone of a broader and

progressive Andean poHcy towarcl increased economic independence and

technological development. 405

In order to counterbalance the expanding role of transnational corporations

in the region, Decision 24 concentrated on the exclusion or diminution of foreign

investments within key sectors of ANCOM's economy and the reduction of foreign

participation to a minority position within local enterprises406, through a

disinvestment or phasing out process, as weIl as by placing limitations on the

acquisition of national firms by foreigners.407 Through this policy, ANCOM

sought the control of foreign investment and its channeling towards the

achievement of national developmental objectives.

The Code focused as weB, on the diminution of the effects of foreign

investment on the balance of payments, through the regulation of profit

404 The formaI titIe is Common Regime of Treatment of Foreign Capital and of Trademarks, Patents, Licenses and Royalties, issued by Junta ~el Acuerdo de Cartagena, on December 31, 1970. Translated in 11 I.L.M.126 (1972). Since Decision 24 covered only technology transfer aspects, ANCOM's technological strategy was developed by two complementary Decisions: Decision 84 on the "Bases for a Subregianal Technology Policy' , and Decision 85 "Common Industrial Praperty Code". Neither of these two Decisions was ratified by aU ANCOM members. Since Decision 84 established only general principles and programs, countries took the position that it did not required formaI ratification. Decision 85, on the other hand established specifie legal norms which would modify internaI Iegislation; therefore it requires formaI ratification by each member.

405 John Pate, "The Andean Common Market", in Technology Transfer: Laws and Practice in Latin America, B. Carl (ed.), 1978, Chapter II, pp. 59-114 at 61.

406 See A. Preziosi, "The Andean Pact's Foreign Investment Code Decision 220: An AgreemeIU ta Disagree", 20 Inter-American Law Review, 1989, at 657.

407 Vaistos, supra, note 401 at 101

"

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remittances and royalty payments and by placing limitations on the access of

foreign enterprises to local sources of credit. The enhancement of the hargainmg

power of host governments vis à vis foreign firms was also a prionty. ANCOM

would achieve this goal by requiring registration of foreign investment:.; and

technology transfer agreements, by regulating the inclusion of restrictive practices

in those agreements and, by excluding foreign firms from certain activities, as

already mentioned.408

The effectiveness of Decision 24 depended on Its common implementation

within ANCOM members.409 The provisions of the Code were to be

homogeneously enforced, within each country's respective legislative system, in

arder to provide foreign investors with a climate of stability and certainty. The

Code allowed a certain margin of difference amongst each country's Iegislatlvc

implementation. as a recognition of distinctÏ\·e economic and social circumstances

in each natiun.410

In the implementation phase, Decision 24 encountered serious difflcultics.

Most authorities argue that the major obstacle engendered by the Code was the

failure ta implement it uniformly. As Vaistos writes, the code was "such a

fundamental change in the legal and administrative structure of the mernher

countries that its introduction did not find an immediately receptive base upon

which ta operate".411

The main administrative and implementation problems were on the one

408 Vaistos, supra, note 401 at 101

409 R. Danino, "The Andean Code Alter Fivt: Year.\''', 8 Lawyer of the Americas, 1975, 635-685 at 675.

410 The Code did not allow member countries to introduce into their individual legislations more flexible or indulgent policies than those contained in the Code.

411 Vaistos, supra, note 401 at 103. It must be noted as well that during the first six years of the Andean Pact, the region faced constant political instability and changes of government. This brought severe problems of policy continuity.

hand, delays in the establishment of the national official institutions and on the

other, the lack of trained personnel and a defined evaluation criteria. This was

especially salient in the area of technology imports, necessary to impIe ment this

Decision within each member country.412

An aspect that must be added to ANCOM's difficulties in implementing

Decision 24, are the organized pressures exerted by the foreign priva te sector

against its adoption,413 and even after the Decision had been approved.

Foreign investors qualified the Decision as "an accident of history ... [which]

emerged as a new spirit ... of anti-foreign economic nationalism,,414 and

predicted the discouragement of foreign investment into that market.415

412 Ibid at 104

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413 It is interesting to note that the top management of the TNEs tended to treat the Andean Code with pragmatism, acknowledging the potential business opportunity presented by the considerable size of the Andean market. Most of the harsh criticism and pressures were exerted, as Vaistos reveals, by "certain interest groups (like associations of patent lawyers), the middle management of the TNE heading the Latin American divisions of their corporations, sorne financial intermediaries and TNE apologists in the academic community". Supra, note 401 at 105.

Vaistos' study offers an in-depth analysis of the attitude of the TNE's top management towards Decision 24 as weIl as on foreign pressures against it; see supra, note 401 at 105-110. For a detailed analysis of the pressures exerted by the United States business cornmunity see: Miguel Wionczek, "La reacCÎon Norteamericana ante el tratado comun a los capitales extranjeros en el Grupo Andino", Comercio Exterior, México, 1971; H. Peterson, ''ANCOM, An Andean Paradox", Col. J. of W. Bus., Vol. VI, No. 4, 1971.

414 R. A. Dîaz, ''The Andean Common Market: Challenge to Foreign Investors", cited in supra, note 401 at 101.

415 The Council of the Americas (an association of the largest United States transnational corporations with direct investments in Latin America) undertook the co-ordination of foreign pressures, once the Decision had been approved. The Council prepared an extensive report -which was sent to the Presidents and Cabinet ministers of the Andean countries- severely criticizing the content of Decision 24 as weil as predicting economic instability in tbe region as a result of its adoption. As revealed in Vaistos's study, "fairly systematic intelligence work was being carried out at the foreign embassy level in the member countries as indicated in discussions and

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The Code also faced interpretation problems which reduced its

effectiveness and credibility vis à vis the foreign business community. In view of

the absence of a common set of guidelines or regulations, the application of

Decision 24 has been described as, "a classic example of the law as written versus

the law as administered or interpreted".416 Basically, tlle Code failed to define

sorne key terms, opening the door to a number of inconsistencies in its

application.417 By way of example, the code does not proviùe an accurate

definition of "foreign direct investment". Consequently, in Colombia direct foreign

investment was the registered imported capital, plus reinvestment, less losses,

while in Bolivia it was considered to be the total investment made and

registered.418

Certainly, the most polemic provisions of the Code were those regulating

fade-out or divestment. ANCOM members believed that any distress caused to

the investor resulting from the adherence ta the code's disinvestment requirements

would be balanced by the benefit of access to the Andean Common Market.419

interviews we undertook with foreign embassy personnel in the Andean Pact". Vaistos, supra, note 401 at 106-108

416 S. F. Rose, "The Andean Pact and ils Foreign Inveslment Code", Tax Management International, 1975, cited in supra, note 401 at J03.

417 Varying interpretations were used byeach country, regarding, amongst others, the following issues: definition of foreign investor; definitlon of forelgn enterprise, particularly those which resulted from investments by joint ventures; differences in the application of divestment requirements; differences in applying provision~ on royalty and dividends remissions. See Vaistos, supra, note 401 at 104.

418 A. Preziosi, supra, note 406 at 664.

419 C. Schill, supra, note 254 at 465. In this author's apI mon the fade-out provisi.on, "while seemingly harsh compared to the traditional attitude toward ownership in this area, is merely another way of doing what Mexico has done for year!). In Mexico, new foreign investment was frequently required to take a minority pos~tion, and administrative pressure was exerted on existing industries to divest themselves of a majority of equity and management functions. Rather than rely upon administrative poiicies and interpretations, the Andean Code specifically imposes such

.,

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This opinion was not shared by foreign investors, mainly from the United

States,420 which considered that the most 1ikely resu]t of these provisions wou]d

be "an increased ownership and intervention of the state leading ta a general

decrease of priva te initiative".421

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Divestment provisions were the main cause for Chile's withdrawal from the

regional market in 1976, given their incongruence with that country's national

interests. Under the Pinochet government (1973-1989) Chile reversed the

nationalization policies adopted by the Allende government pursuant ta Decision

24, and opened the doors to foreign investment in an attempt to divest the

government of its nationalized industries.422 A similar path was fol1owed by

Peru in 1980, when the government began the reversaI of the nationalizations, and

e1iminated the 20% limitation of profit remittances in open conflict with Decision

24. Other ANCOM members responded with the unilateral liberalization of their

own foreign investment laws.

As Pate recognizes, "member countries were not observing the provisions pf

the common policy established by Decision 24, because it was not deemed to be in

their respective national interests".423 The need ta reevaluate the Code's

policies became urgent in order to save Decision 24. Consequent]y, in May 18,

1987 the Presidents of the Andean countries approved the new foreign investment

requirements on a11 new and existing foreign investment". Ibid.

420 It is important ta note that by the 1970's United States investment in the Andean Region ( exc1uding Venezuela) amounted ta $2.4 billions. ANCOM's imports from the United States totaled $1 billion annually. See Mirabito, supra, note 403 at 234.

421 See E. Murphy, supra, note 270 at 294.

422 Preziosi, supra, note 406 at 666 .

423 J. Pate. Introductory Note, 27 I.L.M. 974 (1988) at 974.

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code, Decision 220.424

Decisions 24 and 220 will be studied in this section, focusing on their

regulations regarding transfer of technology. However, in order to attain a

thorough understanding of ANCOM's general policy and objectives, we consider it

necessary ta give a comparative overview of bath decisions main features amI

provisions on foreign investment.

1. ANCOM's General Policy on Foreign Investment: A Comparative

Overview of Decision 24 and Decision 220

Decision 24 required the registration of ail direct foreign investments

before the competent national authority, which was also in charge of the

subsequent supervision of the foreign investor's activities. A study conducted five

years after the implementation of Decision 24, revealed that the registration

process was not conducted systemat:cally amongst member countries. This has

contributed ta the lack of adequate and reliable statistical data on the intlow of

foreign investment ta the region.~25

Foreign investors are still required, under Decision 220, to ohtain

authorization for their investments but approval depends now on tIte discretion of

the hast country's competent authority, attending te the country's own priorities,

rather than on the satisfaction of ANCOM general -equirements.42.6

Decision 220's main feature is that it returns control of foreign investment

424 Decision 220, Andean Code on the Trea/ment of Foreign Capital and on Trademarks, Patents, Licenses and Royalties. Effective May 18, 1987, Gaceta Oficial deI Acuerdo de Cartagena, No. 20 (1987). Reproduced in 27 I.L.M. 974 (1988) with an Introductory Note by John R. Pate.

425 R Danino, supra, note 409 at 652.

426 Decision 220, supra, note 424, arts. l(a), 2.

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and technology transfer to the nationallegislatures.427 Although it contains

many of the tenets of Decision 24, these are not mandatmy; many sections of the

code have been revised to give member countries discretion to comply or abandon

ANCOM foreign investment guidelines.428

Decision 24 prohibited foreign investment in specifie areas of the

economy429 whieh were reserved to the State or national investors, and

imposed limitations to foreign participation in other areas.430 Decision 220 has

eliminated these restrictions by sectors. The only limitation is set forth in article 3,

which suggests that in order to protect national industries, mernber countries shaH

not authorize direct forelgn investment in activities that they deem adequately

covered by eXIsting companies. Moreover, roember countries can authorize direct

foreign investments in new or existing companies when these are included among

the development priorities of the recipient country (article 2).

427 J. Esquirol, "Foreign Investment: Revision of the Andean Foreign Investmelll Code", 29 Harv. Int'l L. J., 1988, 169-177 at 169.

428 Esquirol, supra, note 427 at 169

429 The sectors from which new foreign investment was exc1uded, unless specificaHy authorized by the Member country were: public services, insurance, banking, finance, domestic transportation, advertising, radio, television, periodieals, domestic marketing. Sectors in which special exemption could be granted: basic products (minerais, pipelines, forestry) and other sectors in which the mernher country considers "that special circumstances exist". (Articles 40 ta 44)

430 Article 1 of Decision 24 enumerated three categories of enterprises attending to their percentage of national or foreign ownership:

- National enterprises: those enterprises organized in the recipient country with more than 80% of capital in hands of national investors.

- Mixed enterprises: enterprises organized in the recipient country and whose capital belongs ta national investors in a proportion which fIuctuates between 51% to 80%.

- Foreign enterprises: enterprises organized or established in the recipient country with less than 51 % of capital in hands of national investors.

Decision 220 main tains this classification.

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a. Remittance and Reinvestment

Under Decision 24, foreign investors were allowed to remit abroad, in

freely convertible currency, the net profit resulting from their direct investment up

to a maximum of twenty percent annually, according to Article 37. Although

originally viewed by foreign investors as a profit limitation, the intention of this

provision was ta regulate the annual outflow of foreign currency in order to

alleviate the balance of payment deficit.431

Additionally, foreign investors were permitted to reinvest, without special

authorization, up to 7% of the profits received (Article 13). The reinvestment of

profits over 7%, were considered as a new investment~ th us not allowed without

previous authorization.

Restrictions on repatriation and reinvestment have undergone substantial

changes under Decision 220. The annuallimit on repatriation of profits is

maintained at a maximum of 20%; however, member countries are allowed to

raise this limit without authorization nor approval of ANCOM authorities.432

Limits on the percentage of reinvestment are left to each country's

discretion.433

b. Credit Regulations

Decision 24 limited the access of foreign enterprises to domestic credit, to

short and medium term credit (Article 17), as a way to prote ct local

entrepreneurs' access to financing sources. Foreign loan agreements required

priar approval of the national competent agency and should be registered. These

requirements were primarily intcnded ta prevent the remittance of profits

disguised as excessive interest on loans payments, and the harm to the balance of

431 Danino, supra, note 409 at 654

432 Decision 220, article 15.


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payments resulting therefrom.434

Decision 220 abolished the prohibition on O;J (4-term domestic credit; cach

individual country can now decide whether to perH~Jt foreign companies access to

long, medium or short term domestic credit.435

c. Dispute Resolution

Foreign investment or technology transfer agreements, including clauses

that remove possible conflicts from the jurisdiction and laws of the ho st country,

were prohibited by Decision 24.436 Decision 220 eliminated this requirement

allowing each member country to apply the provisions established in their local

legislation for the settlement of disputes arising from foreign investments or

transfer of technology.437 Therefore, if domestic law permits it, the location

and the law governing the dispute can be negotiated.438

d. Divestment or Fade-out

The divestment or fade-out rules under Decision 24, required foreign

investors to sell to national investors, progressively and in a limited number of

years, the majority share of their investments in the enterprises operating in the

host country, thus transforming foreign enterpT:ses into national or mixed

434 Preziosi, supra, note 406 at 660.


436 Decision 24, Article 51. This provision is a derivation of the "Calvo clause". The Calvo Clause was proposed by an Argentine, Carlos Calvo, in the middle of the 19th century, to prevent foreign investors from invoking the protection of their states in investments disputes with any Latin American country. Although it has not reached the status of an internationallaw principle, it has been included in several lAltin American Constitutions.

437 Decision 220, Article 34.


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enterprises.439 Foreign companies non-compliance with divestment

requirements resulted, in practical terms, in their inability to enjoy any duty free

or other ANCOM benefits.440 Furthermore, aU new enterprises, that is, those

established in the region after July 1, 1971, were also required to divest LInder the

same terms.441

Under the new foreign investment code, Decision 220, provisions for fade

out are completely voluntary, th us applying only to those corn pa mes wishing to

enjoy the benefits derived from the Andean Pact Exemptions Program. New

foreign enterprises are thus not required to divest, and companies already

undergoing fading-out process can request termination or modification to the

current structure.442

B. TECHNOLOGY TRANSFER PROVISIONS IN DECISION 24 AND

439 Under Decision 24 there were two type of transformations: - Voluntary fade out (Article 28) under which foreign enterprises wishing to

enjoy the advantages deriving from the duty-free program of the Cartagena Agreement were to transform into nationéll or mixed enterprises.

- Mandatory fade out (Article 42 and 43), whereby ail foreign enterprises operating in domestic trade, financial sector, domestic transportation, communication and marketing sectors were to transform into national enterprises.

440 P. Schliesser, IIRestrictiolls Oll Foreign Investmelll in the Alldeull Commoll Market", International Lawyer, Vol 5., No. 3, 1971, at 590.

441 Transformation would take place within a period of not more than 15 years in Colombia, Chile and Peru, and 20 years in Bolivia and Ecuador. At the end of the divestment period the percentage of local investment was required to reach 51 % as a minimum, except for the transportation, communication and domestic trade sectors where the rules were more stringent, requiring not less than 80% local partidpation.

442 Decision 220, Article 26. The divestment terms have been extended to 30 years in Colo'1lbia, Peru and Venezuela and thirty-seven years for Bolivia and Ecuador, according to article 25. After this period, local participation should not be less than 51%.

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DECISION 220

1. General Criteria

The general socio-economic criteria guiding the competent national

authority in the evaluation of technology transfer agreements is set forth in Article

18 of Decision 220.443 Aceording to this provision, the competent national

authority should assess the effective contribution of the foreign technology in

terros of its increased profitability (for the aequirer), the priee of the goods which

incorporate the technology and "other specifie forms of quantification of the effect

of the imported technology".444 In view of the absence of guidelines, it is

probably safe ta assume that these other "specifie forms of quantification" will be

prescribed by each country's policy makers. Still, the criteria established in this

provision is very permissive. There does not seem to be a defined policy towards

the acquisition of foreign technology under conditions that allow its adaptation,

absorption and eventual generation of indigenous technology.445

Decision 220 provides446 that ail techno]ogy transfer agreements must

contain information relating to the identification of the modaIities of the transfer

443 This provision corresponds to Article 18 of Decision 24. It has not been modified.

444 Decision 220, Article 18. Decision 84, defines these key criteria by requiring the authorities to consider the effects of the imported technology on local technological developrnent (spillover), employrnent, balance of payrnents, environment, as well as its cortribution to the generation of incorne and to the devcloprnent of specifie developrnent plans of interest to the country or subregion. Sec ANCOM Decision 84 on the Basis for a Subregional Technological Policy, Article 7; Reproduced in 13 I.L.M. 1478 (1974).

445 The only country which included this specifie criteria established by Decision 84 in its national legislation was Colombia, through Decree Law 444 of 1967 and Dccree Law 1234 of 1972. Additional factors such as cost/benefit analysis, availabi1i~y of comparative technology, export possibilities have been included in Colornbian Jegislation. See J. Pate, supra, note 405 at 64

446 Decision 220, Article 19. Corresponds to Article 19 of Decision 24.

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of the technology imported; determination of the duration of the agreement;447

contract value of each of the elements involved in the transfer of technolagy that

is, unpackaging of the technology. Decision 84, which as already mentioned

complements ANCOM's technological policy, stresses the need to abandon the

traditional practice of purchasing sealed "packages" of technology.448 It

requires the competent n~tional authority ta undertake a detailed study as ta

contents of such technological packages and their eventual"dissection",449 in

order to acquire the more adequate technological elements under the mast

advantageous conditions, while obtaining from the local suppliers those elements

that they may be able to furnish.450

Furthermore, Decision 84 requires the supplier to present information on

alternative sources of technologies and conditions for acquiring the se, as weil as

reasons for selecting the particular technology.451 From the perspective of the

acquiring country these last requirements furnish the authorities and local

447 Ullder Decision 24 Andean countries established in their majority very short duration terms for technology transfer agreements. The strictest approach was followed by Colombia where these con tracts had a maximum duration of 3 years (although renewals were granted in most cases). Although conceived in order to maintain control and lower costs, in practice, these short terms have resulted in a proliferation of unregistered agreements and reduction of the flow of technology specially towards the end of the agreement. (See Pate, supra, note 405 at 74)

448 Decision 84, supra, note 444 at 1481

449 Article 1 of Decision 84 defines technological dissection in these terms: "Dissection into its component parts or stages of the elements of technolob'Y for production of goods, or for rendering of a service, or for the process of materializing a project from its inception to its implementation, making a distinction betwcen the essential and the peripheral technology for the purpose of improving negotiating positions in the acquisition of technology, of generating a demand for national or subregional services or goods, of encouraging a process of adaptation, and of contributing ta the pro cess of programming."

450 Ibid

451 Decision 84, supra, note 444, Article 8

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businessmen with crucial information regarding the terms and conditions of the

technology ta be acquired as weil as of the existence of alternative sources. Given

these countries inexperience in the field, lack of comparative sources of

information and scarce resources to allocate to this search, this information would

not be available unless the law demands it from prospective suppliers. From the

supplier's perspective, these disclosure requirements could be the source of

probJems involving the confidentiality or competitive value of the technology

supplied, specially the requirement of unbundling or unpackaging the technology

transferred.

2. Restrictive Practices452

The core of Decision 220's is found in Articles 20 and 24 which establish

the potentially restrictive clauses whose inclusion is prohibited in the context of

contracts for the transfer of technology.153

There is little evidence as ta the effectiveness of the regulation of

restrictive practices in Decision 24. As Pate asserts, those provisions were in many

cases vague and subject ta a wide latitude of interpretation, resulting in

inconsistent application among the countries, as weil as in negotiation problems

for potential licensors.454

Articles 20 and 24 of Decision 220, provide minimal common rules

452 The general definitions and effects of these restrictive practices have already been discussed in Chapter l, supra. Therefore, in this section we 'Yill refer only to the distinctive aspects introduced by ANCOM legislation.

453 Article 20 deals with contracts on the transfer of technology and patents while Article 24 foc uses on trademarks. These provisions modified Articles 20 and 25 of Decision 24. The scope of the se articles is not restricted ta the prohibited clauses enumerated. Other clauses "having similar effects" that is, clauses limiting or hindering the development of local technology or putting the recipient in a disadvantageous position vis à vis the foreign supplier would be prohibited. See Decision 220, Article 20 paragraph h).

454 Pate, supra, note 405 at 65-66

133

regarding the regulation of restrictive practices. The lack of a specifie

interpretation criteria in this area, greatly limits the ability to determine the scope

and effects of these provisions. The development of a set of interpretation

guidelines is strictly in the hands of each member country, according to its own

special objectives and needs.

The clauses prohibited are in general terms, tie-in clauses; permanent use

of personnel designated by the supplier; export restrictions;455 fixed sale or

resale prices;456 restrictions of volume and structure of production; prohibitions

on the use of complementary technology; exclusive sales to the supplier; grant

back clauses; payment of royalties for non-used patents.

The Code allows certain exceptions to these prohibitions. Exception is

made to allow tied purclIases when the supplier offers a competitive priee in the

international market.457 The impredse construction of this provision could he

the source of interpretation problems. The law should have specified that this

exception would be triggered if alternative sources are not available in the local or

international market. The ide a behind it, is benefitting local manufacturers hy

incorporating their inputs whenever possible and reducing the effects on the

balance of payments resulting from the indiscriminate importation of already

available goods. In its actual construction -being the purchase at competitive

priees the only basis for exception-, the law is not adequately protecting the

country's long term economic interests.

Prohibition or limitations of exports embodying the transferred technolo!,'Y

is banned in the framewor:. of patent and technol0~ agreements, except in

"exceptional circumstances, duly evaluated by the national competent entity of the

recipient country". The law fails to clarify what these exceptional circumstances

455

456

457

Decision 220, articles 20 and 24( a)

Decision 220, articles 20(b) and 24 (c)

Decision 220, articles 20 (a) and 24(b)

'f 1

134

involve.458 In the context of trademark licenses, restrictions on exports are

absolutely prohibited. It is maintained persistently and we agree, that if the

transferred technology is to benefit Latin America, it must provide the opportunity

to compete in the world export market. As stated by J. Mirabito, "[T]he present

practice by which the technology is used by the transferee to produce goods for

sale back to the transferor will achieve little in developing exports and

technological skills in Latin America".459

Clauses providing for a purchase option in favor of the supplier of

technology, require skillful handling. If it is the recipient who has the option to

sell the goods to the supplier, the agreement wilJ be purely a commercial

decision460; as such, it should be allowed, mainly when the sL'pplier has

experience and a substantial share in the international markl.'!t on which to allocate

such outputs.

3. Regulation of Royalty Payments

Decision 24 allowed as a general rule, the payment of royalties for the use

of "intangible technological contributions".461 However, in the context of a

foreign parent company and its subsidiary in the host country, these payments

were unconditionally prohibited.

458 Colombia has followed a pragmatic approach in applying prohibitions on export restrictions; exceptions have been allowed where the supplier has claimed the existence of prior exclusive license in the restricted market, but often, a consideration has been exacted: frequently higher export quotas to the not restricted markets. See Pate, supra, note 405 at 96

459 J. Mirabito, supra, note 403 at 236.

460 J. Pate, supra, note 405 at 93.

461 Decision 24, Article 21. Amongst ANCOM rnembers the standard maximum payable for the use of foreign trademarks is 1 % of net sales; this percentage is established by practice; it is not formally contained in the legislation, as in the cases of Mexico and Argentina that set the sa me maximum percentage for the li cense of foreign trademarks.

1

r

135

This provision was the source of serious interpretntion problems. The mnin

flaw was its failure to define the term "intangible technological contributions".

Consequently, there were conflicting interpretations of the term and inconsistent

applications of this important provision within ANCOM countries.

Peruvian authorities, for example, interpreted the allusion to intangible

technological contributions to be intended to exclude foreign trademarks and

technical assistance; no payment of royalties or fees for these technologies could

be allowed.462 Colombian authorities' interpretation of Article 21 of Decision

24 differs from the above mentioned. Within Colombia's legal framework463,

intangible technology includes technical assistance as weil as training, white

tangible technology includes patents and trademarks licensing.464 Following

this interpretation, the Colombian subsidiary is prevented from making payments

for this intangible technology (technical assistance and training), but is allowed

payment of royalties for patents and trademark licenses. Venezuela, on the other

hand, avoids the distinction referring only ta "technological contributions,,,465

and proceeds ta prohibit unconditionally the payment of royalties between parents

and subsidiaries, as provided by the Code.

In light of these problems of interpretation and application, it has been

suggested that the distinction between tangible and intangible technologies should

462 R. Danino, supra, note 409 at 665

463 Colombia implemented Decision 24 by Decree 1900 in cO':ïjunction with Decree 1234.

464 R. Radway, supra, note 207 at 331 et seq.

465 Venezuela's Decree 2442 of November 8, 1977 in its article 68, defines technological contributions as: "aIl supply, sale, lease or cession relating to trademarks, patents or industrial models; instruments, models, documents or instructions for processes or manufacturing methods; assistance in regard to technical procedures or management through qualified personnel, as weil as any other good or service of a similar nature which the Superintendency of Foreign Investment, in its judgment, may classify as such". For an extract of this Decree, see: supra, note 405, Appendix 0-2.

136

be abandoned and the rule applied to transfers of technology in general.466

Although Decision 220 does not abandon the distinction between tangibJe and

intangible technology, it provides a definition of the latter, therefore eliminating

the source of misinterpretations.467

The most important modification introduced by Decision 220 in the context

of technology transfer, is found in Article 21, regulating payment of royalties in

general, and within the parent-subsidiary relationship, in particular.

Primarily, it allows the payment of royalties and/or fees between parent and

subsidiaries, resulting from intangible technological contributions.468 With

these new provisions, transnational corporations will be able to obtain an

economic return for the technological contributions made to the subsidiary469

(through the licensing of a trademark or the allocation of human resources to

provide technical assistance and training, inter alia), white the host country is able

to control the payment of taxes by these enterprises.

4. Other changes

As part of the regional integration program, Decision 24 required that

466 Danino, supra, note 409 at 666

467 Decision 220, article 21. Intangible technological contributions are the resources derived from the technology, such as trademarks, industrial models, technical assistance, and technical know-how, patented or not, which can be presented in the form of objects, technical documents, or instructions.

468 The law indicates however, that the se accrued royalties cannot be computed as capital contributions. The reason behind it is that capital contributions are, according to general accounting principles, tax deductible. Accrued royalties can be capitalized after paying the corresponding taxes.

469 R. Radway, supra, note 207 at 322. Transnational corporations, which are responsible for most of the transfer of intangible technology through their local subsidiaries, argued that Article 21 had "the effect of Iimiting such transfers by making them unprofitable ... ". Ibid

1

f

137

member countries shaH give prefeïenee in their imports to produets embodying

technology of subregional origin. While Decision 220 maintains this provision, it

does not allude ta the content of article 55 of Decision 24, which ealled for the

establishment of a subregional system for the development, promotion, production

and adaptation of teehnology.470 This action is an indication that ANCOM is

moving away from a "multilateral and centralized application of investment

restrictions to a more individual and flexible approach".471

C. EFFECT OF THE LAW ON THE FLOW OF TECHNOLOGY TO

THE ANDEAN REGION

The effect of Decision 24 on the flow of technology to Andean countries is

difficult to assess, since almost no significant data is available. As a consequence,

most of the evaluations are not supported on statistics but mainly on the behavior

of potential foreign suppliers.472 Again, as in the case of Mexico, the opinions

of the authors differ considerably.

Pate affirms that the flow of teehnology decreased under Decision 24, due

ta the "many restrictive norms and the bureaucratie rigidities" potential suppliers

were faciilg, whieh rendered the technology transfer process more diffieult and

riskier.473 In this author's view, suppliers were encouraged ta "seek ways of

470 It must be noted however, that the implementation of Article 55 during the life of Decision 24 was not aeeomplished successfully; as reeognized by Pate, "[A] formaI information exchange system does not exist, nor is one Iikely to be created in the near future"... See supra, note 405 at 77.


472 AlI of these opinions refer ta the effeet of Decision 24. Commentaries or statistics as ta the effect of Decision 220 on the flow of foreign technology and capital ta Andean countries, -as a region, that is- is not available.

473 Pate, supra, note 405 at 105

, , ..

r

138

circurnventing either the letter or the spirit of the rules,,474 or "to simply not

come in al alr.475 This situation was encouraged by another shortcoming of

Decision 24 -unfortunately maintained in Decision 220- which is the failure to

provide a comprehensive list or guideline as to which contracts or agreements fall

within its scope. Bath decisions refer merely "to the irnport of technology and to

the use of ratents and trademarks" (article 18). By failing to cover all the possible

arrangements whose real purpose is the transfer of technology, the law has left an

immense loophole which allows for the manipulation and the circumvention of its

provisions.476

Radway admits that while technology continued to flow into Venezuela and

Colombia,477 much of it has been directed at the "mere maintenance of the

existing operation (market share) and not necessarily at the expansion,

modernization, and increase in efficiency desired by the host countries and the

firms themselves".478

Vaistos' study on the other hand, reveals positive results. This avthor

474 Ibid. These other methods -although designed to circurnvent the Technology transfer law-, were perfectly legal commercial agreements that did not fall within the TT legislation. In this author's opinion the "rigid interpretation and unreasonable administrative intervention and delays" contributed to the situation describeù above. Ibid.

475 Ibid at 84. (emphasis added).

476 In this sense the Mexican law is superior. As already studied the technology transfer Law provides a comprehensive list of "acts, contracts or agreements of every nature" having effects in Mexico and whose purpose is the transfer of technology in any form (i.e. trademarks, patents, technical assistance, services for administration and operation of enterprises, etc.) all of which fall within the scope of the law. Circurnvention of the provisions is avoided to a great extent in this way.

477 Radway, supra, note 236 at 209

478 Ibid. Pate shares this opinion and asserts that where transfer occurs it does not involve many new technologies rather, the technology may be outmoded. Supra, note 405 at 85

r

139

concludes that despite predictions ta the contrary, foreign capital and technolob'Y

inflows, "have increased significantly rather than diminished during the period of

Andean integration".479 Vaistos's estimate is focused on Colombia, the only

country for which detailed data exist for both pre- and post-Andean Pact. In

Colombia, after the Andean Pact was established, the total volume of foreign

direct investment applications rose from 45 million in 1973 to 118 million in 1974

and 54 million in 1975. Prior to the aduption of Decision 24, the volume ranged

from 16 to 32 million from 1967 ta 1971.480

Similar opinion is shared by Correa, who asserts that the establishment of

TOT regimes did not stopped the transfer of forelgn technology to the Andean

region, "as held by sorne superficial criticism, and ln certain cases the tlow of new

agreements has grown at a fast rate".481 This author asserts that in Venezuela,

the number of new agreements almost doubled between 1975 and 1978, white in

Peru, 70 per cent of the contracts authorized by 1976, had been submitted

between 1971 and 1975.482

It cannot be denied, that suppliers faced difficultles in thelr negotiatlons in

the region, due to the irregular and sometlmes unpredictable application of the

provisions by member countries, and wcre encouraged ta circumvent Decision 24

479 Vaistos, supra, note 401 at 102. Vaistos concedes that due to the legal, administrative and political difficulties during the application and implementation of Decision 24, it becomes extremely difficult ta isolate the direct effects of the latter. Ibid at 110

480 Ibid, Table 46 at 112. Information was obtained from Colombm's National Planning Department, Bogota. In Colombia, between 1970 and 1977 the competent authority authorized 2,409 contracts for the supply of technical assistance and services. As to other sorts of technology transfer agreements, the Royalties Committee of Colombia processed 849 contracts from 1967 to June 1979. Sec Corre a, supra, note 20 at 405

481 Corre a, supra, note 20 at 405.

482 Ibid

provisions, as already mentioned. A possible consequence is that many of the

con tracts involving technology transfer are not registered nor monitored and

therefore not included in the data. The few available figures might not be

accurate. The opinions mentioned above might not retlect the reality.

Decision 220 has been weIcomed by foreign investors, mainly due to the

abandonment of the mandatory disinvestment policies and of the prohibition of

royalties payment between parents corporations and subsidiaries. Within

ANCOM members, it has not produced much reaction as these countries had

been witnessing Decision 24's deterioration for several years.

140

The few authors that have dealt with Decision 220 so far, seem to

recognize that, in reaIity, it is the formalization of the members' pa st

transgressions against Decision 24. Put bluntly, "it is an agreement to

disagree".483 The Andean region is moving away from the basic objectives of

Decision 24 of building a strong regional integration and cooperation strategy, and

reopening the doors in order to pursue national interests through foreign

investment and the transfer of technology.

Decision 220 negates any value the code might have had in enhancing the

bargaining position of ANCOM vis à vis foreign investors.484 Moreover, it will

not 'Nevent the competition among member countries for the attraction of foreign

investment; far from that, it has been predicted that ANCOM countries with more

developed markets (Venezuela and Colombia) will attract much of that foreign

investment tlow,485 in detriment to tbf" Jess developed countries of the region

such as, Ecuador and Bolivia.

Foreign investors seeking to penetrate ANCOM markets shotlld now turn

to each country's domestic legislation in order to understand the rule!l of the


484 Esquirol, supra, note 427 at 176. See also, Preziosi, supra, note 406 at 676.


.. 141

game. Decision 220 merely provides a set of guidelines, non-binding provisions,

that each country is free to adapt ta its own developmental needs and programs.

Now it is up ta each Andean country ta live up ta the region's expectations and,

as Preziosi e:xpressed j "maintain the necessary momentum to create a common

market".486

486 Preziosi, supra, note 406 at 677

142

CONCLUSiON

Developing countries' social and economic development is directly linked to

their abiJity to participate in and benefit from technological progress. Their

current lack of technological skills and capabilities has led developing countries to

rely on the acquisition of technology developed by industrialized countries.

The mere importation of technology only tends to encourage and

perpetuate developing countries' dependence on foreign sources of technology and

widens the already enormous economic and social gap between industrialized and

developing countries. In recognizing this state of "dependencia", developing

countries' governments and academics have emphasized the imperative need of

focusing such technological flow towards the generation and strengthening of

indigenous technological capabilities.

The development of indigenous technological capabilities is a challenge of

which developing countries are increasingly becoming aware. However,

overcoming the obstacles that hinder such development is an even bigger

challenge, for it requires changing the structural conditions of the transfer of

technology to developing countries.

The terms under which technology is currently transferred to developing

countries do not reflect their socio-economic needs and developmental priorities.

Several factors prevent these countries from making an effective use of the

technology transferred. At the root of the problem lies the unequal bargaining

power between technology suppliers -transnational corporations for the most part

and technology acquirers. This disparity has direct bearing on the stipulations

included on the legal and commercial agreements for the transfer of technology.

The inclusion of restrictive practices on technology transfer agreements and the

cost of the technology -speciaHy indirect costs- prevent the development and

strengthening of national industries and aggravate the already unbearable balance

of payments and unemployment problems. The conveyance of inappropriate

technology, that is, technology that does not take into aCCOU:lt the development

,,'

143

goals, resource endowments and market conditions of the acquiring country is also

a major deterrent for developing countries' way out from technological

dependence.

Developing countries' should be able to negotiate fair and equitable

transfer of technology agreements. It is necessary then, to strengthen the

acquirer's bargaining leverage vis à vis the power of technolob'Y suppliers.

Developing countries, especially Latin American countries, consider state

intervention -through the formulation of transfer of technolob'Y policies- as the

ma st appropriate means for balancing such unequal bargaining positions and

redressing the terms under which technology is conveyed. State interventu.m

has focused on the improvement of the commercial conditions of the agreements,

particularly with regards to the elimination of restrictive practices, the pnce of the

technology and the control of intra-firm payments, and the unpackaging of the

components of technology transfer packages so as to include locally produœd

inputs. This type of state intervention alone, will not be able to ovcrcome the

technological dependence of the third world. Developing countries' governments

must acknowledge that promoting technological self-reliance in isolation from

national development policies is fruitless. For such transfer of technology policies

to be effective they must be integrated within a national economic and social

development program.

Transfer of technology policies should start by redressing developing

countries' view of the role of technological transfer and the potentiality for

progress it entails. Progress should be understood as the permanent upgrading of

the quality of life of developing societies, rather than as the temporarf satisfaction

of economic and social demands. The lack of defined industrial policie~ and

failure to integrate them with national economic development programs has

resulted on momentary prosperity, rather than on sustained economlC growth.

Additionally, when such polices have been formulated, political instability has

frequently contributed to the lack of continuity on their implementation.

State's intervention should not only be focuscd on the terms and conditions

l ....

-- --------

144

under which technology is acquired from suppliers but also, on the conditions of

application and adaptation of such technology by the technology acquirers.

Transfer of technology policies must encourage local enterprises to undertake

Research and Developrnent both for innovation and irnprovement purposes.

Possible incentives for this activity could be deduction of R&D expenditures frorn

taxable incorne, as put in practice in industrialized countries; providing financial

assistance ta those enterprises undertaking R&D or, entering into risk-sharing

schernes whereby the government assumes certain percentage of the risks in case

of fail ure of the project.

As the ANCOM experience confirms, the skillful implementation and

application of technology transfer legislations bears directly on their success and

on the support they receive from the international business community. To

stimulate foreign capital and technology flow, potential investors and/or suppliers

must be furnished with a stable climate for their investments. National agencies in

charge of the legal, economic and technical evaluation of the transfer of

technology agreements must be integrated by well trained and competent

personnel. Furthermore, transfer of technology legislations should be

complemented bya comprehensive set of interpretation guideHnes, to furnish

foreign parties to technology transfer transactions with a degree of certainty as to

the outcome of the national agency's evaluation.

Industrialized countries, and specially transnational enterprises, must

acknowledge developing countries' right ta benefit from economic, social and

technological progress. Through the enactment of national technology poli cie s,

developing countries are not trying to discourage the flow of foreign technology

and capital from industrialized countries and transnational corporations. On the

contrary, these countries seek further access to foreign sources of supply but under

circumstances that enable them to achieve a deserved economic and social weIl

being and self-reliance. Technology transfer policies are a tool for redressing the

imbalance that characterizes the field technological transfer.

~"-,,,. ,--~~.....,

t'I

Table 1 Number of negative decisions mentioning violation* (From 1 February 1973 - 16 December 1977)

Section Number

1. Part of the technology involved is freely available in the country 9

II. payment was not proportionate to the technology acquired or was an injust and excessive burden on the national economy+ 1710

III. Unjustified intervention in administration of the licensee 448

IV. Obligation to provide free or under disadvantageous circumstances the licensee's best patents or trademarks 430

V. Restrictions on the licensee's technical development 152

VI. Obligation to acquire intermediate products, machinery or equipment from the supplier of technology 145

VII. Export restrictions contrary to the interests of the country 351

VIII.F~ohibition of the use of complementary technology 46

% of negatives of the total

0.45

85.11

22.29

21.40

7.56

7.21

17.47

2.28

~

% in respect of total decisions

returned

4

27.99

7.33

7.03

2.48

2.37

5.74

0.75

......

"\

IX. Obligation to sell products produced by the licensee exclusively to the licensor 50

X. Obligation to permanently utilize personnel indicated by the licensor 9

XI. Limitation of production volume or imposition of sales prices++ 779

XII. Obligation to enter into sales or exclusive representation contracts with the licensor within national territory 10

XIII. Establishment of excessive terms of va1idity+

XIV. Subjection to foreign laws or obligation to submit to foreign courts the findings or verdicts of lawsuits which might arise in connection with the interpretation or fulfilment of the contracts

Negative verdicts given exclusively by reason of Section II

770

456

608

2.48

0.44

38.77

0.49

38.32

22.69

30.26

* total of negative decisions, for one reason or another, was 2009.

r

0.81

0.14

12.75

0.16

12.60

7.46

9.95

+ global number of contracts violating Sections II and III is lower than the total of the sub-groups; some contracts were rejected by reason of various violations of the same section. ++ majority of violations against Section XI arise from clauses obliging the acquirer not to use the knowledge transferred for the manufacture of products after termination of the contract.

Source: Alvarez soberknis, supra, note 158 at 720.

.'

TABLE 2 TOTAL DIRECT CUMUL~TIVE FOREING INVESTMENT

(Million current dollars)

ACCU MULATED NEW DIRECT

YEAR INVESTMEN % FOREING T INVESTMENT

1973 287.3 26.1 4359.5

1974 362.3 28.6 4721.7

1975 295.0 1.4 5016.6

1976 299.1 9.4 5315.8

1977 327.1 17.2 5642.9

1978 383.3 111.3 6036.2

1979 810.0 100.3 8636.2

1980 1622.6 4.8 8458.8

1981 1701.1 -63.2 10159.9

1982 626.5 9.1 10786.4

1983 683.7 110.9 11470.1

1984 1442.2 29.7 12899.9

1985 1871.0 29.6 14628,9

1986 2424.2 60.0 17053.]

1987 3877.2 -18.6 20930.3

1988 3157.1 -30.8 24087.4

1989Pl 2185.4 26272.8

pl Preliminary Data (January-November)

147

%

8.3

6.2

6.n

6.2

6.8

23.7

13.4

20.1

6.2

6.3

12.5

13.4

]6.6

22.7

] 5.1

9.1

Source: INEGI, National Institute of Statistics, Geography and Informatics, "Mexico: Economie and Social Information", September-December 1989, Volume 1.

1.

2.

3. 4.

5.

6.

APPENDIX

Summary of the Activities of the Nationa~ Registry for the Transfer of Technology as regards

the Evaluation and Registration of Contracts (1 February 1973 - 16 December 1977)

Total number of contracts judged by the National Registry for the Transfer of Technology Contracts submitted for registration: Total contracts submitted Positive or negative decisions returned Submitted for registration, but cancelled before:

a decision was given pending derision

Positive decisions Negative decisions An important percentage of the favourable verdicts are the result of renegotiations and modifications carried out at the Department's request and accepted by the parties. Reconsidera tions: 805 appeals have been presented in connection with the 2009 negative verdicts issued by the Department, of which 501 have been processed: 359 in favour of the party presenting the appeal and 142 rejected, with 304 still awaiting a decision. The latter will, in theiT majority, be approved in due course, since the contracts have been renegotiated in terms suggested by the Department, and the only thing now lacking is formalization of the respective modifications. Amparo proceedings: Decisions returned by the Department have given Tise to 45 amparo proceedings before the competent legal authorities, of which 12 have had verdicts returned in the Department's favour (10 by dismissal and two by denial of amparo); in five more cases, the District Judge has conceded amparo and federal protection, although appeals have been made in both cases ta the respective Circuit Court on Administrative Matters; while 28 cases are still awaiting a verdict before District Judges or the corresponding Circuit Courts.

148

6109

6306 6109

61 136

3903 2009

Source: Jaime Alvarez Soberanis, "The Need 10 Establish a Policy Restricting Ihe Use of Foreign Trademarks in Developing Countries: The Case of Mexico", World Development Vol. 7, 1979, at 725

.,

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Chudnoysky, D. Foreign Trademarks in Developing COUluries, 7 World Development, 1979, pp.663-682.

Comercio Exterior, Mexico, 1976, Vol. 26, No. 8.

Contractor, Farok. The Compositiom of Licensing Fees and Arrangements as a Function of Economic Development of Tf!chnology in Recipient Nations, 11 J. of Int'I Bus. Studies, No. 3, p. 47, 1980.

Correa, Carlos. Transfer of Technology in Latin America: A Decade of Control, 15 JWfL, 1981, pp. 388-409.

Correa, Carlos. Main Issues in the Regulation of Licence Arrangements on Foreign Trademarks: The Latin American Experience, 7 World Deyelopment, 1979, pp. 705-711.

Danino, Roberto. The Andean Code After Five Years, 8 Lawyer of the Americas, 1975, No. 1, pp.635-685

Delgado, J. Highlights to the Amendment to the MeJ:ican Patent and Trademark La .. ,!, 15 Int'1. Bus. Law., 1987.

Epstein, Edward. Introduction to Recent Developments in Mexican Law: Polilics of Modem Nationalism, 4 Den. J. of Int'!. L. & Pol'y., 1974, No. 1.

Esquirol, J. Foreign Investment: Revision of the Andean Foreign Investment Code, 29 Harv. Int'I. L. J., 1988, pp.169-177.

..

153

Ewing, A. F. Transfer alld Developbzg of Tec/mology: 71ze Problems of Del'elopillg Coumries, 11 JWTL, 1977.

FORTUNE, Why Mexico is looking better?, January 15, 1990, pp.135-137

Goekjian, Samuel. Legal Prob/ems of Trallsferrbzg Tec/mology to the Third World, 25 American J. of Comp. L., 1977, p.565.

Goldman, E. Intemational Trademark Licensing Agreements: A Key to Future Tec/mological Developmelll, 16 Cal. W. Int'l L. J., 1986, pp.178-204.

Gutterman, A. Challging Tremis in Ihe COIl/ellt and Purpose of Mexico:\' IllIelleclual Property Righi Regime, 20 Ga. J. Int'l. & Comp. L., 19QO

Grynspan, Devora. Teclzllology Transfer Pat/ems and IndustrializatiOll in LessDeveloped Coulllries: A Study of Licensing in Costa Rica, 36 Int'l Org., 1982, pp.795-806.

Hansen, Barbara, Economic Aspects of Tec/lIlological Tramfer to Developing Countries, 1 Int'!. Rev. of Industrial Property and Copyright Law, 1980.

Hill, J. and Still, R. Cullural Effects of Tec/mology Transfer by Multinational Corporations in Lesser Deve/oped Coumries, 15 Columbia .J. W. Bus., No. 2, 1980, p.40-51

Hyde, Alan. 1981 Mexican Transfer of TeclulOlogy Law, 15 Lawyer of the Americas, 37-45, 1983.

Hyde, A. and Ramirez de la Corte. Mexico 's New Transfer of Tec/m%gy and Foreign Investmem Laws -To what extem have the rules changed?, 10 In1'l. Law., 1976, pp. 251

Inman, H. and Ortiz Tirado, A. A Mexican Dividend: Las Maquiladoras, In1'l. Law., 1975, Vol. 9, No. 3, pp,431-440.

Leavy, J. Recent Developments ill Latin America Legislation 011 Technology Transfers, 14 Int'l Bus. Lawyer, 1986, pp. 362.

Lopez Valdez, Abelardo. The Andean Foreign InveSlment Code: An Analysis, 7 J. Int'l Law & Economies, No.!, 1972, pp.1-19

Mirabito, J. The Control of Techn%gy Tra1lSfer: The Burke-Hanke Legislation and the Andean Foreign Investment Code: The MNE Faces the Nations, 9 Int'I, Law., 1975, No. 2., pp.215-238.

154

Murphy, Ewell E. The Andean Decisions on Foreign Investment: An International Matrix of National Law, 24 Int'l. Law., 1990, pp.643-654

Perenzin, Dominic A. Regulation of the Andeall Investmenl Code: Colombia, 4 Lawyer of the Americas, 1972, pp.15-27

Perlmutter, H. Perplexing Roules ID M.N.E. Legitimacy: Codes of COllduct for Technology Transfer, Stanf. J. Intl'l St., (1976), Vol. XI. Number X, pp.169-199.

Peters, J. Irwin. The New Industrial Property Laws in Mexico and Brazil: Implications for Multinational Corporations, 12 Columbia J. W. Bus., No.1, 1977, p.70-79

Peterson, H. ANCOM: An Andean Paradox, Col. J. of W. Bus., (1974), Vol VI, No. 4.

Preziosi, A. nie Andean Pl7ct's Foreign Investmem Code Decision 220: An Agreement 10 Disagree, 20 Inter-American L. Rev., 1989, pp.649-677.

Radway, R. Ami/rust, Tee/mology Trans/ers and Joilll Ventures in Latin American Development, 15 Lawyer of the Americas, 1983, pp. 47-70.

Radway, R. Comparative Evolution of Tee/mology Transfer Policies in Latin America: The Practical Realities, 9 Denv. J. of Int'l. L. & Po1'y., 1980.

Radway, R. Doing Business in Mexico: A Practical Legal Analysis, 14 Int'l. Law., 1980, pp. 361-376.

Radway, R. Transler of Technology to Colombia: A Proposai to Modify Decision 24, 12 Lawyer of the Americas, 1980, pp. 321-341.

Rangel Medina, David. Significant Innovations of the New Mexican Law on Inventions and Trademarks, 7 Ga. J. Int'l & Camp. L., 1977, pp.5-16.

Rojas, Hector. New Foreign Investmf7n1 Regulations of Mexico, 18 Int'l Bus. Law., March 1990.

SchilI, Charles. 17le Mexican and Andean Investment Codes: An Overview and Comparison, 6 Law and Policy in Int'l Bus., 1974, pp.437-482.

Schliesser, P. RestrictiollS on Foreign Investment in the Andean Commoll Market, 5 Int'l. Law., 1971, No. 3.

Thompson, D. The UNCTAD Code ail Transfer of Teclm%gy, 16 JWfL, 19H2, pp.311-337.

155

Vaistos, Constantin. The Revision of the Intematiolla/ Palelll System: Lega/ Considerations for a Third Wor/d Position, 4 World Development, No. 5, p. 85.

Weidner, Helen. The United States and North-South Tec/m%gy Transfer, 1983 Wisconsin Int'l L. J., 205-228.

Wilner, Gabriel M. The Transfer of Techn%gy ta Latin America, 14 Vanderbilt J. of Transnational Law, Spring 1981, pp.269-279.

INTERNATIONAL ORGANIZAT/ONS

UNCTAD

Guidelines for the study of the Transfer of Tee/mology ta Developillg Countries, 1972, United Nations, Document TD/B/AC.l1/9, iv, 59p.

An International Code of Conduct on Transfer of Technology. Report by the UNCfAD Secretariat, 1975, United Nations, Document TD/B/C.6/AC.1/2 Supp. lIRev.l, viii, 60p.

The Role of Trademarks in Developing Coulltries. Report by UNerAD Secretariat, 1979, United Nations, Document TD/B/C.6/AC.3/3/Rev.l, vii, 30p.

The Role of the Patent System in the Transfer of Technology to Developing Countries. 1975, United Nations, Document TD/B/AC.ll/19/Rev. 1) ix, 69p.

The Role of Transnational Enterprises in Latin American ecollomic integration efforts: Who integrates, and with whom, 110W and for whose benefit. Study by Constantin Vaistos, January 1983, United Nations, Document UNCT AD/ST /ECDC/19.

Technology Policies for Development and Se/ected Issues for Action. 1988, United Nations, Document UNer AD TT 94, xxix, 264p.

The Channels and Mechanisms for Transfer of Technology from Deve/oped to Developing countries. Study by Charles Cooper, 1971 United Nations, Document TD/B/AC.ll/5.

Formulation of a Strategy for the Technological Transformation of Developing

coumries, 1980, United Nations, Document TDIB/779.

COlllrol of Restrictive Practices in Transfer of Technology Transactions. Selected principal regulations, policy guidelines and case law at the national and regionallevels, 1982, United Nations, Document TDIB/C.6/72.

156

Major Issues Arising [rom the Transfer cf Technology. A case study of Spain, 1974, United Nations, Document TDIB/AC/.ll/17.

Major Issues Arising from the Transfer of Technology to Developing Coumries, 1975, United Nations, Document TD/B/AC.l1/lO Rev. 2.

UNCTC

Licence Agreemellls in Developing Coulllries, 1987, United Nations, Document ST/CfC/78.

UNIDO

Guidelines for the Acquisition of Foreign Technology in Developing Countries, 1973, United Nations, Document 10/98.

Technological Self-Reliance of the Developing coumries: Towards Operational Strategies, 1983, Development and Transfer of Technology Series, No. 15, United Nations, Document ID/262/

OECD North-South Technology Transfer: The Adjustments Ahead, 1981.

Technology and Global Competition: The Challenge for Newly Industrialising Economies, Paris, Development Centre, 1989.

WIPO, Licensing Guide for Developing countries, Geneva, 1977.

ECU (United Nations Economie Commission for Latin America and the Caribbean, Review No. 41, 1990, Santiago, Chile.

ECOSOC, Reports on the Impact of Mull.inational Corporations on the Development Process and on International Relations, 1974, United Nations, Document E/5500.

CED (Committee for Economie Development). Transnational Corporations and Developing Countries: New Policies for a Changing World Economy, New York, 1981.

#

LEGISLATIVE MATER1AL

Mexico

Law to PromOie Mexican 11lvestme1lt and ID Regulate Foreign 1llVeSlment, Diario Oficial, Mexico, D.F., 9 de marzo 9, 1973.

157

Regulations ID the Foreign Inve.:.tmellt Law, Diario Oficial, Mexico, D.F., 16 de mayo, 1989.

Law for the Registration of the Trallsfer of Teclm%gy and the Use and Exploitation of Patents and Trademarks, Diario Oficial, Mexico, D.F., Decemhcr 30, 1972.

Law for the Colltrol and Registration of the Transfer of Tecluw/og)' and the Use and Exploitation of Patems and Trademarks, DIano Oficml, Mexico, D.F., January 11, 1982.

Reglamento de la Ley sobre el Comrol y Registro de la Transfereneia de Tecnologia y el Uso y Explotacion de Patentes y Marcas, Diario Oficial, Mexico, D.F., Martes 9 de Enera de 1990.

ANCOM

Decision 24 - Common Regime of Treatment of Foreign Capital and of Trademarks, Patems, Licenses, and Royalties, adopted December 31, 1970 by the Commission of the Cartagena Agreement. Repraduced In II I.L.M. 138 (1972)

Decision 84 - Decision on the Bases for a Subregùmal Tecillw/ogicai Po/ky, adopted June 5, 1974 by the Commission of the Cartagena Agreement. Reproduced in 13 I.L.M. 1478 (1974)

Decision 220 - Andean Code on the Treatmelll of Foreign Capital and on Trademarks, Patents, Licenses and Roya/ties, Adopted at 44th Ordinary Penod of Sessions of the Andean Group, May 11, 1987. Reproduced in 27 I.L.M. 974 (1988)

Documents

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