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Mexico’s new economy

A new economy for licensing in Mexico

The Mexican government is revamping its policies in response to political, economic and social developments. As a result, licensing will soon play an increasingly important role in investment strategies

By Hector E Chagoya, Becerril, Coca & Becerril, SC, Mexico City
In recent years political, economical and social changes have prompted the Mexican government to revise its economic policies and recognise the need for innovation in order to boost competitiveness. This article describes these changes, which should open up new and valuable opportunities for investment, and ultimately for licensing. New economic policy In November 2007 the Economy Secretariat issued a document announcing a new sectoral economic policy. The idea is to tailor strategies to boost the competitiveness of different sectors. The strategies of greatest relevance to licensing are as follows: • Promotion of entrepreneurship through university spin-offs, seed funding and risk capital. This will require the amendment of certain laws and will eventually increase the opportunities to develop enterprises based on technology developed at Mexican R&D centres. • Mining. The Secretariat will promote investment and risk capital to fund exploration and extraction activities, as well as activities relating to sustainability and downstream activities. The related IP will be very important. • Franchising. The Secretariat will establish and promote a National Franchising System, in order to promote the rapid growth of successful micro, small and medium-sized enterprises. • Technology parks. The Secretariat will

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promote the creation of technology parks in order to boost innovation. Tourism and crafts. The Secretariat will promote projects to be developed in remote communities relating to sustainable tourism, as well as to competitive design, production, distribution and commercialisation of artisanal crafts. In this regard, IP licensing will be relevant for exports, given that design will be promoted. Transportation and logistics. Among other measures, the Secretariat will promote projects for the development of transportation services and infrastructure, in order to make them competitive and improve coverage, prices and efficiency. IP relating to infrastructure of this kind will be crucial to such projects. The measures also include modernisation of and investment in customs, which will lead to improved control of counterfeiting. Energy. The Secretariat will promote investment in all areas except those reserved to the Mexican state (ie, petroleum and electricity). Although investment in alternative energy sources will be promoted and some projects have been planned, viability concerns may make it difficult to attract investment. Intellectual property and licensing in this area will play an important role. Telecommunications. The Secretariat will promote convergence of television, internet and telephone services; this process has already begun. This means that licensing of copyright and other intangibles will become increasingly important and complex once the major

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provider, Telmex, starts providing full services. Antitrust. Various changes to the anti-monopoly laws have been proposed which could impose more restrictive conditions on transactions in strategic sectors. Trends at the Federal Competition Commission suggest that awareness of IP issues in such cases will increase with time and may eventually fall into line with generally accepted international standards in regards to licensing and antitrust. Agriculture. The Secretariat will revamp the regulations on the exploitation of agricultural fields, which often inhibit development and growth. This is important given the shift towards bioproducts, which is expected to continue in the years to come. Innovation. The Secretariat will promote projects in which the adoption of technology will enhance innovation. Specifically, the Secretariat will support research projects from enterprises interested in acquiring technology from R&D centres. IP promotion and enforcement. The Secretariat will promote IP rights and anti-counterfeiting measures through promotional campaigns, coordinated investigations and visits. Free trade agreements. The Secretariat will promote the proper management of free trade agreements and the signature of further agreements, mainly with Asia-Pacific countries. This will lead to harmonisation of IP issues and introduce new rules to be observed with regard to the payment of royalties under licensing agreements. Information technology. The Secretariat aims to position Mexico as an active provider of IT services through certification and standardisation, which will have a significant impact on licensing activities. Basic industries. The Secretariat will promote the modernisation and assimilation of new technologies in traditional industries such as textiles, leather and toys. Manufacturing industries. The secretariat will promote the modernisation of established manufacturing industries such as automotive and electronics. Emerging technologies and industries. The secretariat will promote the

development of industries based on nanotechnology, biotechnology, electronics, aeronautics and aerospace, to enhance the competitiveness of the economy. Last call for petroleum Mexico’s economy is significantly affected by the petroleum economy. PEMEX, the state oil company, has a major impact on public finances. The lack of investment in exploration to increase petroleum reserves has led to a crisis. Production in the Cantarell oil field, known as one of the world’s most productive, is in decline and the field will soon be exhausted. Although petroleum prices are soaring worldwide, the benefit in Mexico has been offset by the fact that significant amounts of gasoline have had to be imported at similar prices and production is on the wane. Against this background, President Felipe Calderon proposed the Energy Bill to the Mexican Congress in early April 2008. The bill aims to make PEMEX more competitive and to increase its production capacity, and perhaps more importantly, its refining capacity. The bill has been received as a last call for petroleum: it is thought that the shift towards alternative energy sources will soon make the petroleum industry less profitable, socially acceptable and environmentally viable. Discussions on the state-owned status of PEMEX have prompted a wider debate as to whether private capital should be allowed for a range of activities, from extraction to refining and even petrochemical processing. This has delayed the reform of the PEMEX statutes, bylaws and regulations, although changes are still expected to be issued later this year. In spite of the political environment, there is consensus on the following issues, which the reforms should address and which will have an impact on licensing activities in the petroleum industry: • Flexibility in contracting. Government contracting is generally subject to formalities and timing requirements that make contracting activities extremely inefficient and costly for PEMEX. Such schemes also limit control over contract performance once a purchase or contract has been granted. • Taxation regime. PEMEX is subject to a special taxation regime which means that it is obliged to pay more in taxes than it makes in profits. The intention is to ensure that PEMEX is taxed at the

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same rate as regular companies, so that it can have flexibility for investment in new projects. Surveillance and control of contracting and finances. In addition to limited control over purchases, PEMEX has suffered historically from corruption and dubious financing practices. This needs to be addressed through modern and effective governance practices that will enhance productivity and transparency. Increase in oil reserves and production. Sooner or later all technologies relating to exploration (especially deep water) and improved recovery will become important, and intellectual property will play a fundamental role in such activities. Construction of at least two new refineries. Petroleum refining patents should be revised, maintained and prepared for use in such projects. Although co-investment schemes such as Deer Park in the United States have been discussed, their acceptance seems unlikely. Role of PEMEX. PEMEX will continue to have exclusive control of oil and gas-related activities, from extraction to basic petrochemicals. Profit sharing will not be allowed. This means that for the sake of licensing, royalties on net sales will continue to be prohibited under the Mexican Constitution. Therefore, intellectual property will continue to be of strategic importance in contracting with PEMEX. The possibility of some sort of alliance or other scheme is still under discussion and might be permitted, although it is unlikely to be publicised much since politically it would not be well received. Mandatory investment in R&D activities. Extraordinary funding will be available for R&D projects, especially through the Mexican Institute of Petroleum (IMP), but also for projects outside the institute.

It is expected PEMEX’s R&D funding will represent between 0.1% and 0.6% of net sales, of which around 30% will be assigned to IMP. Given the above, numerous opportunities for licensing in major projects will soon arise. Therefore, all intellectual property for technologies relating to the petroleum value chain should be maintained and filed in Mexico, and the result of the debates before the Mexican Congress in Mexico should be carefully analysed in order to implement licensing strategies in accordance with the new laws that will be introduced. Bioenergy The Law on the Promotion and Development of Bioenergy was enacted on February 2008. The law is consistent with the general objective of promoting private investment in energy sectors that are not reserved to the Mexican state. Under the law, the government will issue the corresponding regulations in November 2008; all related projects have been halted until then. For the purposes of the new law, “bioenergy” is any fuel obtained from biomass of organic materials obtained through agriculture, livestock, jungle exploitation, aquaculture, algae, fishing, industrial or commercial residues, microorganisms or enzymes, or its derivatives. All activities relating to the production, storage, transport, distribution and commercialisation of bioenergy are regulated by the law. Under Article 24 of the law, interested parties will require permission from the Energy Secretariat. In addition, under the Energy Strategic Programme, the government will provide funding for projects and R&D involving alternative energy sources such as bioenergy. However, several projects have not yet begun, due to the lack of regulations for granting permissions, but most importantly due to the economic and political

Héctor Chagoya is manager of consulting for technology transfer issues and business and technical aspects of patent litigation at Becerril, Coca & Becerril, SC. He is engaged in relevant aspects of patent prosecution, drafting and litigation, and in negotiation of domestic and international technology transfer contracts. His areas of practice include technology transfer and negotiation, technology protection and enforcement, patent searches, documentation and appropriation of trade secrets, drafting of international PCT applications and plant varieties.

Hector E Chagoya Manager of Technology Transfer & Technology Brokerage Email: hchagoya@bcb.com.mx Tel: +52 55 5263 8730 Becerril, Coca & Becerril, SC Mexico www.bcb.com.mx

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restrictions presented by increases in the price of grain generally, and of corn specifically. In Mexico, this is a very politically sensitive market. According to a study of the Energy Secretariat, corn, along with sugar cane, is the most productive crop for ethanol in Mexico. At present, investment in this sector involves a great deal of uncertainty. The regulations and standards to be enacted and published will define the future of the industry. However, given the prevailing economic policy, the industry should afford significant opportunities for investment – and for licensing – since it will be fully opened to private investment.

Conclusion The Mexican government is revising economic policy in a variety of sectors and regions, which will make Mexico more attractive to investment. Licensing and intellectual property will play an increasingly important role in investment strategies, given the efforts to increase investment in R&D activities, especially in the sectors outlined above. As Mexico’s IP system has all the elements required for prosecution and enforcement of IP rights, licensing will soon become increasingly common. As Mexico evolves, the new economy based on intangible assets and licensing will soon permeate its commercial framework.

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posted:3/5/2009
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