Local content strategies: meeting the requirements and protecting valuable intellectual property and know-how in emerging economies
As companies involved in oil exploration, renewables, manufacturing and other industries expand their horizons internationally into countries with rapidly-expanding economies, it is more important than ever to ensure that valuable intellectual property is not put at risk.
These rapidly developing countries have huge purchasing power and vast natural resources which offer tremendous opportunities to firms looking to expand their operations into new territories. Understandably these countries often incentivise foreign companies, via tax breaks and other mechanisms, to use local materials, create jobs and share technological knowledge and skills with the local workforce. These ‘local content requirements’ can pose a significant risk to the valuable intellectual property (IP) companies own.
The UK Intellectual Property Office estimates that IP, which is an intangible asset, represents more than 50% of the value of most businesses. Clearly, therefore, it is vital that companies setting up business in emerging economies put in place a local content strategic plan that includes measures to safeguard their valuable IP and know-how.
Brazil is one of the world’s fastest-expanding economies and has catapulted itself into the top tier of global oil producers, particularly with recently discovered pre-salt reserves. It, like many other emerging economies, has put in place a local content regulation framework. Whilst there is no absolute prohibition of commercialisation of imported products, the Brazilian government has introduced various mechanisms to encourage a high level of local content (in many cases over 60%). Examples include quotas for local manufactured goods in government tenders; local content policies in companies strongly connected with the government, e.g. Petrobras; licensing requirements; and affording subsidised financing and tax breaks to companies with high local content. The level of local content is measured by index formulae which determine the ratio of imported components, including raw materials, against domestic components in materials, goods and equipment. A high local content ensures a percentage of manufacture carried out in Brazil by the local population.
Companies expanding into countries such as Brazil ought to have a local content strategic plan to take advantage of the obvious benefits of using a local work force, which include engagement and goodwill in the area, reduced operating costs and being able to take advantage of existing supply lines. Clearly, delivering substantial training and competency development systems to the local work force is a good thing.
However, there are risks associated with such knowledge transfer and any local content strategic plan should consider protection of its IP as a valuable asset. Companies should, of course, extend their intellectual property portfolio registrations into the new territory by, for example, registering patents, trademarks and designs in that country. This will no doubt enhance their value and protection.
Businesses should also, however, beware of underestimating the value of their know-how as a valuable intellectual property asset. Know-how cannot, in itself, be registered (unless it forms part of a patent or other form of IP that can be registered). It can be protected by confidentiality, but companies often don’t recognise or value know-how. However it is know-how – be it process techniques, databases of information, optimal production settings, waste reduction methods – that often gives a company true competitive advantage. Many companies do not adequately record and assess their know-how on a regular basis, but this is important, particularly at the point of expanding into a country which has local content laws. A company should assess how much know-how it retains, whether such know-how is adequately recorded and whether any of it ought to be protected by registration of patents or designs, or treated with enhanced confidentiality. This is especially the case for companies that may have, to date, steered away from registering intellectual property as a strategic decision to avoid such know-how being placed in the public domain. Clearly with local content requirements, this strategy will be more difficult to control and monitor, and companies that fall into this category should carefully consider how they disseminate such information and skills.
In addition to having a due diligence procedure to assess and record existing know-how and other intellectual property, and a programme of protection (either by registration or enhanced confidentiality), an effective local content strategic plan should also include procedures for monitoring and capturing know-how and other intellectual property produced locally. Don’t assume that a company automatically owns intellectual property created by its employees or contractors. It is commonly the case, for example, that a company does not own intellectual property created by individuals that are non-employee contractors. It is important therefore to put in place contractual arrangements for the company’s ownership of know-how and other intellectual property. If it is decided that the best way to achieve local content requirements is to enter into a joint venture or purchase a local company, intellectual property arrangements should be addressed in the relevant contracts.
The UK Intellectual Property Office states that ʺbusinesses that actively manage their Intellectual Property (IP) as a financial asset outperform their peers by up to 30%ʺ. This improved performance could be increased significantly when combined with an expansion into a country with vast natural resources and the benefit of a substantial new workforce. It is vital, however, that companies hoping to take advantage of the opportunities offered by rapidly developing countries protect themselves with a clear local content strategy that includes the active management of intellectual property.
Kirstie McDonald is an associate in the Intellectual Property, Technology & Outsourcing Team at Brodies LLP.
Associate, Intellectual Property, Technology & Outsourcing Team
On behalf of Brodies LLP
Glasgow, Scotland, UK
Direct Line: + 44 (0) 141 245 6288
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