During the past two decades, the Far East region (including Southeast Asia) has been the most promising and highest growth area in the world.  Despite the recent cyclic downturn, the region is expected to recover and prosper in the 21st century.  Technology companies are developing businesses in the Far East region by effectively implementing technology transfer through joint venture or straight licensing and other appropriate vehicles.
Past economic growth in the Far East has been led by strong manufacturing expansion.  The most fundamental requirement in the region is technology transfer.
 
PROMISING REGION
The economies of the Asian countries are growing at a rate of 6-7%, more than twice that of the industrialized nations.  Economic growth in China has been averaging 10-13% annual growth in the 1990's.
Business activities of the private sector generate social development of the region.  In order to successfully conduct business in the Far East, a company needs to thoroughly understand the economic, social and cultural characteristics of the region and adapt to them.
 
CHANGES IN WORLD ECONOMY AND TECHNOLOGY TRANSFER
The significance of technology in our society is accelerating.  World-wide-technology transfers are becoming critical to corporate and economic growth.  Today, the life cycle of technology is short.  Development and transfer of technology are completed in a short time period.  Companies and industries which rely upon old technology fall behind quickly.

Due to accelerating transportation and communication improvements, the world is shrinking.  Cross-continent and cross-country technology transfers are occurring over much broader areas and at a accelerated rate.  Because science and technology have become increasing complex, individual companies cannot independently develop all technologies they need.  In order for companies to remain competitive, strategic alliances and other forms of technology transfer are critical growth generators.
International technology transfers are implemented in many forms.  In a rapidly changing world industrial system, individual companies and governments need to effectively implement technology transfer for optimum utilization on an international basis.  In North America, Canada, Mexico and the U.S. ratified the historic NAFTA.  In China, the constitution was modified to provide for a socialist market economy, setting in motion broad reforms and liberalization.

Industrialized nations are now moving swiftly toward attainment of the information society.  As a result of these fundamental changes, the basic paradigm of international politics and economy is changing much more rapidly than at any time in the 20th century.
 
CHARACTERISTICS OF THE FAR EAST
Asia has a large and growing population exceeding 1.8 billion and is increasing quickly.  China has 1.2 billion people and its population increases annually by 17 million.  The annual increase is almost equivalent to Malaysia's total population.
The second characteristic of the Far East is multi-culturalism.  A multitude of religions exist in this region.  Political systems also vary widely in a spectrum that includes socialism, democracy, monarchy and military dictatorship.  The third attribute is the diversity in income levels.  In the Far East, the per-capita GNP ranges from $30,000 to $300.

In addition, another important feature should be kept in mind.  In the Far East, regional economic alliances may be created spontaneously.  While both the EU and NAFTA are regional alliances established by the treaties, in the Far East, the emergence of regional economic alliances occurs on an ad hoc basis.  For example, China has the South China economic zone including Hong Kong, Taiwan and Guangdong and Fujian Provinces of China;  the Yellow Sea economic zone by Chinese provinces on the Yellow Sea, South Korea and Japan;  and the Baht economic zone by Thailand, Cambodia and their neighboring countries.  In the future, a Japan Sea Economic Zone may be recognized by North and South Korea, the North Eastern provinces of China, Siberia and Japan.

Licensing practices in the Far East should be based on analysis of economic circumstances in each area, promotion of technology transfer under licensor's business strategy and recognition of cultural characteristics of the Far East.
 
THE JAPANESE EXPERIENCE
The Japanese experience of technology licensing is an interesting example.  After World War II, many Japanese technology companies started licensing technology from the United States and Europe.  Japanese industry had been largely destroyed in the war and most Japanese industries were far behind Europe and the United States in technology.  Japanese industries needed to obtain licenses for advanced technologies from Europe and the United States in order to expedite national growth.
Japanese industries introduced new technologies to accelerate its modernization.  Japanese companies obtained many licenses for new technologies such as petrochemicals, plastics, synthetic fibers and rubbers and chemical technologies from American and European companies, either through joint ventures or through straight licenses.  There are many examples of Japanese licensees which achieved the successful transfer and adoption of licensed technologies.  After many years of development, various Japanese industries, such as chemical, fiber, automobile and many other industries, lead worldwide in terms of productivity and technology.

Many Japanese companies have become licensors of new technologies.  Japanese companies have developed and commercialized important new technologies.  For example, Japanese companies have entered numerous foreign licenses of diverse technologies, such as fibers, salt manufacturing, ion exchange membrane, polyethylene technology to companies world-wide.  Through technology licensing, Japanese licensors recover R&D expenses in the form of license fees, and establish a worldwide reputation for high-level technology. 

Traditionally, Japanese technology companies expend 5% of total annual revenues towards R&D for development of their own technologies and for their own business activities.  However, it is often impractical for these companies to operate in other parts of the world.  Direct investment may not be justified due to limited financial capability, lack of a local marketing network and country risk.  Licensing of the technology through qualified licensees provides opportunities to quickly penetrate new markets at minimal cost and risk.

License practices are well established in many Japanese manufacturing companies.  Industrial categories include transportation machinery; pharmaceutical, chemical, electrical/ electronic, precision machinery, plastics, nonmetal, general machinery, and electrical machinery. 
 
JAPAN, TAIWAN, KOREA
& DEVELOPING COUNTRIES
As a result of shortages in labor and huge increases in labor costs, land costs and other inputs and currency appreciation, Japan as well as Taiwan and Korea have been pursuing growth through capital-intensive development of new products and services and creation of new methods of production and distribution.  Massive relocation of labor-intensive line production industries to Thailand, Malaysia, Indonesia and the Philippines is continuing.  Also, Japan, Korea and Taiwan are investing in capital-intensive domestic technological development, including factory automation, and switching to high value-added, technology-intensive products.  Korean conglomerates (“Chaebol”) have been investing heavily in domestic scientific, technical education and R&D programs. 

As a result of these relocations, there are excellent opportunities in these countries for marketing innovations and technologies by transfer into subsidiaries or joint ventures or by straight sale or licensing.  Similar opportunities will emerge in Thailand, Malaysia, Indonesia and the Philippines as these countries progress to industrialized status and convert to more capital-intensive investment in technological efficiency and product and process innovation.

New production processes based upon microelectronics processing technologies (e.g. new generation robots, computer-aided design (CAD), computer-aided manufacture (CAM) and computer-integrated manufacturing (CIN) is revolutionizing industry to the extent that they reduce the comparative advantages of low-wage, low-cost countries in the Far East, even for labor-intensive and raw material-intensive industries.  Flexible automation of old and new production processes further reduce labor costs and increase the efficiency of industrial manufacture in the West.

Labor substitution and cost reduction capabilities of new technologies may erode the relative advantages of low cost labor and slow growth prospects in developing countries.  The developing countries need to adopt the new production technologies and develop the necessary technical skills to introduce the technologies.  Although these developing Asian countries will struggle for a period, they will ultimately benefit from efficiency gains of new technologies.  There will be opportunities for selling, licensing and transferring Western technology into these countries.
 
LICENSING PRINCIPLES
Licensing may be a key management strategy for technology companies.  A substantial percentage of technology companies show strong interest in royalty income because royalty income does not bear any expenses and generate net profit.  The majority of companies prefer to grant non-exclusive licenses which are, in principle, available to any interested party.
In general, technology transfers should be adopted on an as-is basis.  A licensed technology is usually developed and perfected after repeated trial and error by the licensor.  Often, the technical staff of the licensee is familiar with the licensed technology or similar technology, and it may modify the licensed technology before actually practicing it.  However, there are many examples of new plants failing to commence production for lengthy time periods due to alteration or modification of the licensed technology.  It is risky for a licensee to immediately modify licensed technology without input from the licensor.

Licensing payments for licenses of technologies from foreign countries and royalty income from technology exports reveal the magnitude of trade in connection with international licensing activities. The U.S. is the only country that has a royalty income far greater than its royalty payment in technical trade.  The following Table 1 shows ratios of import to export of technologies in major countries :
 
TABLE 1

USA	4.78 ($19.1 billion/$3.99 billion) in 1991
Japan	0.94 ($3.2 billion/$3.4 billion) in 1991
Germany	0.45 ($1.7 billion/$3.76 billion) in 1991
France	0.67 ($1.73 billion/$2.6 billion) in 1990
U.K.	0.96 ($2.36 billion/$2.47 billion) in 1989

 
BASIS FOR ROYALTY CALCULATIONS
Surveys have discussed which factors are considered most important for royalty calculation. 2  Table 2 shows that the projected sales amount is the highest concern for both licenses-out and licenses-in.  Unit price and sales volume follow as the next most relevant in the case of licenses-in.  These two items are closely related to the projected sales amount so that that licensee's concern for the projected sales amount is of greatest significance.  Another important factor is the average rate within relevant technical fields.  Profits from the license is often not a major factor.
 
TABLE 2 - FACTORS IN ROYALTY CALCULATIONS
 

LICENSE-OUT		LICENSE-IN
PROJECTED SALES	40	PROJECTED SALES	48
R&D COSTS	34	UNIT PRICE	26
TECHNOLOGY CONTRIBUTION	26	SALES VOLUME	26
PROJECTED PROFIT	12	OWN DEVELOPMENT COSTS	26
		PROJECTED COSTS	17

 
1  Monthly Report on Statistics for International Balance of Payment", Bank of Japan, 1992
2  Report on Specific and Technological Researches (Japan), Management and Coordination Agency, Statistic Bureau, 1992
 
LICENSING EXPERTISE
It is essential to recognize cultural differences in licensing activities in foreign countries.  In the past several years, Japanese licensing activities have grown quickly in China and other developing countries in the region.  Licensing in China requires an understanding of unique Chinese processes, commencing from Chinese investigation of the technology, contract negotiation and through plant operation.  The licensor must be aware of the types of problems that may occur in China during each step of the licensing effort, the time frame that may be required for each step, and the correct persons and agencies which must approve of the activity.

The licensor should investigate a prospective licensee's pattern of business activities to determine answers to several potential problems.  For example, has the prospective licensee entered into prior licenses in which it trespassed upon the licensor's own market?  Does the licensee have the current capacity in terms of financial and human resources to expand its business to adequately develop and produce the licensed product?  Will the licensee be capable of commencing plant construction and completing construction in a timely manner?
 
COOPERATION AND TRENDS
Licensing activities should encompass an understanding of various business considerations.  Ventures in developing countries which lack financial capabilities to achieve high economic growth often require cooperation with banking sectors to obtain funds to assist in improving industrial infrastructure and other necessary improvements.  In Japan, it is important to establish a cooperative relationship with Japanese trading firms ("Shosha").  Because Japanese trading firms may have a global marketing network, they may improve the marketing capability of licensees.

In technology transfers, there is an increasing trend toward reducing straight licensing, and promoting strategic alliances with other process owners and local industrial businesses.

If a new venture company will be created with cross-license arrangements and joint R&D work, it is essential to understand the business and financial stability of the prospective licensee.  For example, if the licensee has financial difficulties or merges with an other company, the new venture company may be jeopardized.
 
LUMP-SUM VS.  RUNNING ROYALTY PAYMENTS
Surveys have shown that running royalties account for the majority of licenses for patents, utility models or industrial designs as well as for patent and know-how licenses.  Approximately one-half of pure know-how licenses involve running royalties.  On average, 70% of license agreements adopt a running royalty policy.  Although usage depends upon the form of intellectual property, running royalties are much more common than lump-sum payments. As the importance of know-how increases, lump sum payments are used more often.
 
PERCENTAGE ROYALTY AND PER QUANTITY ROYALTY
Royalties based on percentage of sales dominate by a large percentage.  Per quantity royalties may be based on the number of units produced or sold.  When know-how is included in the license, the percentage royalty is more frequently used in patent and know-how licenses than in pure patent licenses.
The use of percentage royalty and per-quantity royalty is roughly equal, however, the latter is gradually increasing.  It should be noted, however, that software licenses are included and they commonly use the per quantity royalty.
 
OTHER FACTORS IN ROYALTY CALCULATIONS
Other factors used in royalty calculations include average rate within relevant technical fields and the rate charged by the licensor to others.  The established rate is very important when making royalty decisions for both licensing-in and licensing-out.
Licensees express a higher interest in prospective sales than licensors.  Licensors do not place as much importance on the amount of their profits when compared with licensees.  Licensors and licensees show relatively low concern for development costs, primarily each party's own costs, not the costs of other.  Approximately 70% adopt net sales price as a royalty base.  In some occasions, total revenue (total sales amount) is used instead.  Profits are rarely used as a base.

The general trend is that lower rates are used in patent licenses for domestic arrangements, and that relatively higher rates, especially above 5% are found in patent/know-how licenses for international arrangements.  U.S. companies generally target a 2% to 5% royalty rate, although some U.S. companies target 5% to 10% and even higher ranges.
 
LICENSEE IMPROVEMENTS
When a company starts a new business under a technology license, it may be desirable to adopt a fresh approach to the production, sales, and R&D for the new business.  A licensee may benefit from adopting aspects of the corporate culture of the licensor.

After successful plant start-up by a licensee, licensees often improve and advance the licensed technology, and develop peripheral technologies.  Such development efforts may create significant improvements and development of new processes and products.

Both industrialized and developing countries cooperate in establishing an advanced international system in which countries specialize in specific industries in connection with regional economic alliances.
 
SUMMARY
Contractual terms and conditions in licenses must adapt to the customs and environment of the licensee's country.  Effective licensing on a global scale requires licensing expertise.  Licensing experts should have experience in licensing negotiations, knowledge relating to the target countries in terms of negotiating styles, government systems, taxation, distribution channels, plant construction conditions, and technical capabilities.

There are numerous challenges in licensing which must be managed by businesses.  Corporate management must take a strategic view in determining whether to license a technology that has been developed at substantial cost, effort, and investment, and has become an important element of its own operations.  When a technology is developed for a new business, corporate management must examine possible globalization of the business and consider the potential and the impact of strategic alliances, including options such as joint ventures, technology exchanges, and the authorizing of production based on the technology.  The licensor must determine whether it can allocate the resources necessary to carry out the technology transfer to the licensees.  Consideration must also be given to the possibility of an adverse impact on the licensor's own market.  The licensor must examine the technical, financial, and management capabilities of prospective licensees and decide whether to proceed to negotiations with specific companies.