Foreign Market Entry Metro Corporation: Technology Licensing Negotiation

1. Synopsis of the case. ` Metro Corporation and Impecina Constructions S. A. of Peru had the negotiations about the licensing of the Petroleum Tank Technology. After the series of the negotiations they finally reached the agreement, however the Peruvian Government did not approve the 10 years agreement life and Metro appears to have resigned itself to the 5 years agreement. Question 1. The role of Government intervention into the licensing negotiations. Licensing negotiations have always been subject to the Government interventions of both developing and industrial advanced countries. This is due to the tremendous importance of the technology transfers for the country. It is obvious that the clever government policy in licensing can significantly improve the economical situation in the country and boost the technological development. The successful examples are, for instance, South Korea and Japan. There are numerous reasons for government interventions into the licensing negotiations: Development goals Revenue goals Balance of Payment objectives Employment protection Competition protection Sectoral adjustment policies Health and Safety protection National security International political goals

Development goals: In recent years governments, especially those in developing countries, have encouraged inflows of technology as a major means of achieving national development goals.(Bradley, 1995) Thus the government interventions into the licensing negotiations are aimed to increase local industrial skills and ensure that technology will actually be transferred to local nationals and there are no restrictions on using the technology after expiry of the agreement. Government of the recepient country also encouraging own R&D in the country by making sure that there are no: Restrictions on introducing similar technology during the implementation of the joint R&D. Restrictions on closely-related field of R&D. Restrictions on same field of R&D after completion of the joint R&D. Restrictions on future R&D on joint results. (Lilly, 1997) Obtaining "state of the art" technology is also a major concearn for both developing and industrial advanced countries. Recepient Government usually wants to ensure that the technology in question is the best possible. For the developed countries this means obtaining core competitive advantage through the "state of the art" technology, boosting the prestige and prosperity of the country. Revenue goals: The Provider government may seek to satisfy itself that comm commercial returns are realistic and have particular interest in ensuring that the licensing agreement is not just a means of reducing taxable income in the home country. In particular the authorities may check that A fair price is charged for the technology and support Returns from licensing intellectual property to foreign ventures (royalties, initial fees, managment fees e.t.c.) are remitted to the home company and not "banked to offshore subsidiaries to avoid tax. (CIM handbook) The Recepient government usually looks at the duration and levels of fees and/or royalties.

Developing countries in particular wish to ensure that charges for technology are not excessive and that the technology transferred is appropriate. "Excessive" is usually defined as any price above the lowest possible cost for obtaining the technology in any other way. Compensation should also commensurate with the technology package (technology`s age and life expectancy, contribution of the technology to the export and development of the local R&D capacity, contribution of the technology to the licensee`s performance and alternative sources of technology). The recepient government is concearned about taxation before repatriation of fees/royalties and sometimes rejects tax clauses obligating the licensee to pay taxes on royalties. Balance of payments objectives: All the payments made by the licensee are reflected in the Balance of payments in debit as the negative cashflow. If these payments are significant, it can result in the deficit of the balance of payment and depreciation of the national currency. The Balance of payments is the clear indicator of the economic health and investment attractiveness of the country. The recepient government, especially in developing countries, such as Peru is also concerned about the foreign exchange outgoings. When the country doesn`t have the hard (convertible) currency it may want to limit the outflow of the foreign exchange. Sometimes the authorities may seek to have fees and royalties paid in whole or in part with goods (countertrade). Competition protection: Lisensing is subject to anti-trust/antimonopoly laws in all national jurisdictions. As a general rule, antitrust laws prohibit international technology licensing agreements that unreasonably restrict imports of competing goods or technology into the country or unreasonably restrain domestic competition or exports by local persons. Whether or not a restraint is reasonable is a fact-specific determination that is made after consideration of the availability of: Competing goods or technology; Market shares; Barriers to entry; The business justifications for and the duration of contractual restraints. National Security, Health protection and International political goals: The government can also intervene into the licensing negotiations when there is threat to the national security or the agreement doesn`t go along with the ideology and the international political goals of the state. Technology transfer from industries considered sensitive (e.g. Defence related) may require prior approval to ensure that: Its export doesn`t compromise defence of the nation; it is not exported to unfriendly nations; Sale doesn`t breach any political sanctions. (Root, 1994) It is also important for the government to prevent disclosure of secret formulations. These are particular concerns of the Provider government especially in the developed countries. The Recepient government tends to controll the quality to insure that production output meets acceptable international standarts.

The regulations of the technology licensing proccess consist of: International regulations, such as TRIPS agreement in the WTO and Block Exemption Regulations EU. National laws, including: Industrial property laws, Anti-Monopoly laws, Anti-Trust laws, Taxation legislation Regulatory Guidelines &Technology control systems Jawboning - informal intervention, without a legal basis, which is common practice in the countries, where the government has a lot of influence in the private sector. (Russia, China) The licensing regulations in the developing countries have two main goals: to get better terms for the local licensees and to prevent abuses by foreign licensors to the deteriment of national licensees and Economy. Developed countries` regulations are aimed to ensure the fair trade, taxation, sensitive technology transfers monitoring, obtaining core competitive advantage. However, the long-term goal appears to involve using licensable technology to raise the industrial standards of the world's developing countries, thereby providing a broader technological base to use the technologies of the future. (Lilley, 1997)

Overall, it is clear that every multinational firm should establish any local rules or regulations that will require the involvment of local authorities in approving any content of the licence before starting the negotiations with the licensee.The lisensor must be prepared to negotiate with host governments as well as with licensees. So why the Peruvian Government dissallowed 10 years agreement life? Paying the royalties over 10 years is detriment for Impecina and the Economy as it involves significant outflow of the currency. But regarding Impecina`s capability, extention of the agreement life after 5 years is a very open question. Probably the peruvian firm would not need Metro any more or at list would be able to negotiate the better terms after 5 years.

Besides, after the agreement expires in 5 years, Impecina gets the technology, can freely use it, expand to other markets. It will also encourage the local R&D in the shorter period of time. So the Peruvian government was clearly persuing revenue and development goals as well as the balance of payment objectives.

2. List what each party is offering, and what it hopes to receive: Each list illustrates that what one company is offering, is what the other company hopes to receive i.e. the things that Impecina is offering, are those things that Metro wishes to receive and what Metro is offering, is what Impecina requires: Metro offering: Metro wants:

Impecina offering: Impecina wants:

3. Identify the elements in each list that are a 'must' and those where 'flexibility' might be show, explain your answer. In the list, those which are 'flexible' are typically those which each party is willing to sacrifice, or compromise during the negotiations, those that are defined as a 'must' are elements that each party is not willing to sacrifice, or lose, i.e. the things that are a necessity for doing business. Lets look firstly at Metros wants; The fact that the company is offering a ceiling on the number of days that Impecina can request from them, is due to the fact that Metro is offering Impecina the technology alone, with immediate assistance only afterwards. This can be defined as a 'must' due to the fact that Metro requires engineers for other work, the fact that they are assisting Impecina after the installation, is an add in bonus for Impecina, hence they need to put restrictions on the number of days requested, after all time is precious, and time equals money! Metro also requires that all payments are made in US dollars, after all taxes and withholdings have been paid, evidently, this is a 'must' Metro do not want royalties lost to exchange rate commission and local taxes etc, they want net payments. Metros desire for cross licensing, is an important request, and is therefore also a 'must' Impecina must cross license so that this enables Metro to see exactly what is being done with their product, also the fact that Metro may one day be able to license the technology to another firm, hence all improvements and adjustments made to the technology must be updated to Metro, in turn, Metro will provide Impecina with all details of R&D done to the technology, which is a form of compromise. This is vital, as the improvements made to the technology by Impecina, will aid Metro in devising their next product. Although the lump sum payment amount to Metro is flexible, the amount will always remain high, this is because the company need a bulk of payment from Impecina at an early stage, as the deal is high risk, an the Peruvian governments attitude is uncertain. This is a 'safe strategy' adopted by Metro so that as high a cost as possible is recovered at an early stage and so that cash flow is generated in the first shot of payment. The percentage royalties, paid to Metro fits into the 'flexible' category, and therefore it is open to negotiation, obviously, to Metro, this is profit and Impecina it is a cost, therefore, Metro will bat as high as possible, where as Impecina will try to pay as little as possible. Referring to Impecina list, it is important to state, that their main motive of negotiation, is to gain the computer package which will allow them to save time and money in developing the computer package in-house, evidently, as stated previously, the purchase of the computer package is an expense to Impecina, hence they want it at the lowest price possible. The firm does however need the technology to build roof tanks and to suit the increasing demand of the Peruvian Government, of which Impecina aims to capture one-third of the market share. This is hence a 'must' as Impecinas' customers dictate the size of the roofs, it is also a 'must' that the license must cover all roof sizes, this means that Metro is also at a gain as they are receiving royalties on all roof sizes. When the license is authorised, Impecina will be able to use Metros name for bidding purposes, the license will also allow Impecina to utilise Metros trademark and name. As Metro is a huge, reputable company, Impecina is more than privileged to have this name attached to them, also the fact that all their competitors are affiliated with others, means

that Impecinas way of becoming more powerful in terms of bidding, is through licensing with Metro, hence this is a 'must' so long as the licensee informs the licensor how, when and where they are using their name for. Impecinas need for exclusivity is 'flexible' although during the negotiation period, the firm is persistent that they want exclusive rights within in Libya, Morocco, Columbia, Brazil, Argentina and Venezuela, they are willing to sacrifice loosing exclusive rights in some of the territories, in the means of a compromise. At the end of the negotiation, Metro offers Impecina exclusive rights within Peru and Columbia only. This can be categorised as 'flexible' because Impecina are milking the cow for al its worth, they know that Metro will not give in too all o f their demands, however they see how much they can receive from Metro.

Question 4: Describe negotiatating tactics or ploys each party used or could have used. When negotiating in business several tactics can be used. These tactics are utilized in order for each party to gain as much of their interest as they can. In the case of Metro and Impecina both parties use tactics which can be classified in different groups. Tactics used by Metro: Exclusivity: Metro agrees tactically to grant Impecina exclusivity over Colombia and Peru. However this is only on a three year trial period and only if Impecina manages to capture one third of the market share. In other words what their offering is a conditional offer. Another tactic is that Metro also offers a vague promise to give future exclusive rights in Libya, Algeria, Morocco, Brazil, Venezuela, Argentina. This vague promise is not really a promise but rather an incentive for Impecina to provide maximum performance. Royalty-formula: Bait is also offered in the form of a formula for Impecina to avoid diminishing competitiveness due to a large lump sum fee. It is said "This formula could reduce the first 5 years royalties" Source Case 5 page^^ Since Metro is offering this "formula" they ought to know if it works or not. Saying it could work is saying nothing. This formula does most probably not work. Since no Licensor-company would offer its licensee a formula where the royalties they would receive would decrease. Agreement life: Metro offers Impecina a 10 year payment-agreement-period. The tactic behind this is that they know it is not in their hands - it is up to the Peruvian Government. But since they have offered it they can say later: "that at least we tried to give you that it is not our fault you didn't get it" Cross-licensing: Metro also offers Impecina receipt of further benefits, on R&D and improvements during the licensed period. This tactic is used to gain cross-licensing from Impecina, which in the future will help Metro hence it will give them a better technology for the computer system.

At the same time Metro also wants Impecina to provide them with all improvements and information that occurs on the computer system, during the licensing agreement period. The tactic behind this is that in the future there is big likelihood that both parties will compete with each other, since this technology is "bread and butter' for both companies, it is important that Metro receives an improved computer system after the licensed period. Other tactics: Metro offers transfer of the technology for the tanks alone and only for immediate assistance for a specific time period . Metro wants to get in and out quickly. This is because time is perceived as money. Lump sum: Metro want as large a lump sum as possible. The tactic to achieve this is to: Cover their sunk costs as well as additional costs Make profit at an early stage, because technology depreciates quickly Apply a 'safe' strategy to gain quick profits, due to risk factors Maintain a flexible lump sum fee - but it will always be high, so that they can have room to manoeuvre around the lump sum price and give rebate in the end. Have a sufficient margin to cover any uncertainties Undermining by questioning Impecinas' abilities: Metro asks Impecina to guarantee that they will be able to capture 1/3 of the market share; knowing that Impecina can't guarantee this, this is done to undermine them. This tactic is commonly used in negotiation tactics. Give and Take: Metro offers Impecina the chance to sub-license to its controlled subsidiaries, however Impecina have not requested this. White lies! When negotiating the wage of Metro engineers, Metro points out that $225 of per diem fees, at best cover costs, and do not generate profits. This is untruthful because it is stated in the case that just lump sum fee alone covers costs and makes profits. Stalling: A common practise is to save the hardest issues for last- so the other party is worn out and give in more easily. This tactic was applied by leaving the discussion on compensation (royalty) for later discussion, because Metro had already made profits from the lump sum, while acting as they had not.

Tactics used by Impecina: In order to gain something from Metro, Impecina asks for something else, well-knowing that they can not get it. Exclusivity: Impecina asks for exclusivity for Libya, Algeria, Morocco, Brazil, Venezuela and Argentina. Impecina is fully aware that their wish for exclusivity in all countries will not be granted, the only reason why Impecina asks for exclusivity is because they know that it is not possible for Metro to grant them that. This tactic is used to influence Metro to give them a substitute incentive. This is also commonly known as throwing bait.

In the text it is also mentioned that "Impecina kept cropping up the issue about license coverage" through being persistent they are asserting their companies needs. Agreement life: Well-knowing that they wouldn't be granted the 10 year payment-agreement-period they quickly accepts it. The tactic behind this is that they know it is not in their hands - but up to the Peruvian Government. Since they are not granted the 10 year agreement period, they can ask Metro to give them something else. "Since we didn't get that, we should have something else" Exaggeration to gain Metros interest ! Impecina used past figures to justify future market share estimate of one third. They also say that as a 'rule of thumb' profits mark up are 6%, however, there is no set way of determining future profits, they then exaggerated and said mark ups could be 12% just to create incentive. However later it is known that realistically it would 5-6%. When talking about the licensee market size, Impecina "threw out" an estimate of $200 million government expenditure & $40 million private sector spending over the next 3 yrs. Later when they looked into it it showed that it was about $150 million expenditure.

White lies ! Impecina basically uses potentially fictious arguments to gain what they want. E.g. Impecina wants the license-agreement to cover all tank sizes, to support their argument: Impecina claimed that their competitors did probably not pay their licensors for the small roof tanks and therefore Impecina would be in disadvantage if it had to pay Metro for the small tanks. Impecina claimed that customers dictate the size of the tanks, hence the license should cover all tank sizes. (I.e under 100 feet) Other tactics: Impecina only offered sliding royalties, because they did not want to pay a large lump sum. Impecina decreased lump sum by $100,000 .This is done through "give and take tactics". When metro attacks Impecina through interrogation regarding future market share, Impecina realise this is one of Metros main objectives of the negotiation, Impecina use this to learn valuable things about Metros lack of knowledge regarding the Peruvian market. This is used to create a better situation for Impecina.

Tactics used by both parties Competition: Both parties tactically agree that Metro cannot directly do business in Peru in the future. The reason behind this is: For Impecina: One day Metros technology will become obsolete, therefore Impecina may want to invest in other technologies in the future, and use another licensors trade name. For Metro: After the agreement life, due to cross licensing, Metro will have improved technology which they can license to another firm, or become direct competitors of Impecina. Agreement life: Metro and Impecina agreed to a 10 year agreement, just for the sake of it, they know its up to Peruvian Government, so later, Metro can say "we tried, its not our fault you didn't get it". And Impecina can imply that since they did not get it, they should have something else. Stalling:

Both parties use time to stall, in order to mentally re-group and think of the next step. The pause allows each party to summarise the outcome so far, and to see what the rest of the negotiation needs to be focused on. Outcome of the negotiations: Metro negotiators said "the Peruvians did not bat an eye-lid at Metros demand". The reason for this being is that, Impecina got exactly what they wanted. E.g. hi-tech technology at a low price, the lump sum was decreased by $100, 000 ! Metro is also satisfied, as they benefited from cross-licensing and entered other markets, which was their primary goal with licensing. Conclusion: The shape of the negotiated agreement depends on the bargaining power of the two parties, which is determined by the importance of the deal for each one of them. Following factors indicates why each party has a strong bargaining power.

In summary, Metro's and Impecina's bargaining power is determined by their limitations and capabilities. Metro has the opportunity to gain higher market share and expand through Impecinas´ activities. Since Metros´ Local Government forbids foreign export, licensing is the company's only option, thus they are very dependent on Impecina. Impecina is dependant on Metro because designing technology in-house will be time consuming and costly. It will also require many resources. They do realise that in terms of quantity, they are giving Metro a limited number of offers. However, they also know that their few offers are equally quantifiable as Metros numerous offers.

References: Case Study: Metro corporation: Technology Licensing Negotiation Bradley F., Market Entry strategies 2002 Hennessy D., Jeannet J., 2004, Global Marketing Strategies, Houghton Mifflin Company Hollensen S; 3rd; 2004; Global Marketing - 3rd Edition 2004 Root, F., 1994, Entry Strategy for International Markets, Jossey-Bass Lilley R., LICENSING IN JAPAN:CURRENT ISSUES 1997lRoot, F., 1994, Entry Strategy for International Markets, Jossey-Bass The CIM Handbook of Export Marketing, 1995 Lecture notes Seminar notes