Puerto Rico has achieved many coups in a long history of obtaining foreign direct investment in difficult circumstances. But one recent success must be counted among the most remarkable. The Irish pharmaceuticals company Galen (now part of Warner Chilcott) was seeking a destination to locate a new plant and approached the development authorities in the Republic of Ireland. The Republic has a long and distinguished history of attracting high-quality pharmaceutical FDI. But negotiations were dragging on, so the company checked out the market and lighted upon Puerto Rico. Puerto Rico (according to local investment company, PRIDCO) was able to deliver a plant and favourable economic package more quickly, and the company expanded into the sunny Caribbean destination, employing some 300 local Puerto Ricans.
Puerto Rico’s skills at attracting FDI have been honed by a long history of promoting itself and its investment package. In fact, the country has been involved with foreign direct investment long before most small companies had heard the term, let alone got out into the market to hunt for funds and investors. It started to pursue its industrial and economic development as long ago as 1942, when it created the Puerto Rico Industrial Development Company (PRIDCO) to manage real-estate requirements for companies. PRIDCO was complemented by the creation of the Economic Promotion Administration in 1948, which had the brief of promoting Puerto Rico to companies. These two agencies were unified in 1998.
The island initially pursued a policy of import substitution with the government acquiring companies in low-technology sectors like shoe manufacturing, cement production and bottling companies. This effort at public ownership as the route to stimulate the economy was quickly abandoned in favour of bringing in the private sector. This policy has been pursued eagerly ever since.
The island passed its first Industrial Incentives Law in 1948. This was a particularly generous piece of legislation, granting new investors 100% exemption for eligible industrial activities based in Puerto Rico. It also made concessions for local taxes and licences. The financial incentives were complemented with the provision of facilities including industrial space provided by PRIDCO. Land was acquired, developed and provided to the investor as a basic shell for the company.
The 1948 law set the tone for subsequent incentives legislation and this is reviewed and updated every 10 years, enabling the island to keep abreast of competitors. Hiram Ramirez-Rangel, executive director of PRIDCO, says: “This is a good thing because it gives us a chance to assess our strengths and weaknesses in comparison with other jurisdictions.” The law will be reviewed next in 2008.
Companies involved in textiles, shoes, food processing and other simple processes, mostly from the US, were particularly attracted by the island’s tax advantages, industrial facilities and low wages that pertained at that time. Unfettered access to the US market was already regarded as particularly beneficial element in the Puerto Rican package as very few other jurisdictions had comparable access to the US.
The arrival of General Electric to Puerto Rico in 1956 with a switch-making plant is seen as a landmark event in the island’s history. GE’s arrival opened the way for other electronics sector companies. GE has retained, indeed strengthened, its links with the island and now has eight plants in Puerto Rico.
The first pharmaceutical company to arrive in Puerto Rico opened up in 1957, and in 1960, US giant Eli Lilly followed. Over the course of the 1970s and 1980s, many pharmaceuticals companies set up facilities in Puerto Rico. Today, 15 out of the top 20 of the world’s largest pharmaceutical companies currently have facilities there. Some 28,000 people are employed in the pharmaceutical sector, according to the Department of Labor.
Puerto Rico has benefited from the global demand for biotechnology products and four leading producers, with a total investment topping $2bn, have established high-value plants there. American biotechnology giant, Amgen, heads the list with a $1.2bn investment, followed by Eli Lilly, which has invested $650m, and Abbot Laboratories, which has invested $350m. A Johnson & Johnson subsidiary has a smaller operation. Puerto Rico is said, by Amgen, to be the third largest centre of US biotechnology manufacturing after California and Massachusetts. Mr Ramirez-Rangel says: “We are wooing companies, we are pursuing new projects in this very competitive field. Our most promising new sector is biotechnology. We have been at the forefront of traditional chemical syntheses in pharmaceutical manufacturing. But the future appears to have a greater role for medicine concerning the manipulation of living organisms, that is, biotechnology. We definitely want to be there.”
While biotechnology thrives, companies providing engineering services are also coming to Puerto Rico. A joint venture between Infotech Information Services, an Indian company, and Pratt and Whitney, a subsidiary of United Technologies, to set up an engineering service sector providing software development for the evaluation of control systems for jet engines, has been a landmark. Mr Ramirez-Rangel says: “This is an entirely new sector in Puerto Rico and most of the employees are engineers and people with a background in computer software design.”
A skilled workforce
The island’s skilled workforce is a key selling point for potential foreign investors and Puerto Ricans are sought out by many leading US institutions including NASA, the American Space Agency and Hewlett Packard. HP rates Puerto Rican educational institutions in the same high category for excellence as American centres like Stamford University and the Georgia Institute of Technology. Puerto Rico’s employees tend to be both well educated and, at the very least, bi-lingual, speaking both Spanish and English.
The presence on the island of a large and sophisticated field office of the US Food and Drug Administration (FDA) attracts pharmaceutical companies, particularly as the FDA assists a company to validate its facilities, plant or machinery quickly. The island’s political and legal status also ensures that corporations using sensitive and proprietary technology in their plants are covered by Federal US intellectual property (IP) protection. US IP laws apply in Puerto Rico in exactly the same way as they do at home, falling within the jurisdiction of US Federal courts. Mr Ramirez-Rangel says: “This gives companies bringing proprietary technology peace of mind. The incentives for someone who has access to information to sell it to a third party who has the capacity to manufacture it is removed because the same laws apply in the US as Puerto Rico. A Federal court enforces it in Puerto Rico.” The risk of IP theft is said to be a growing concern of companies setting up plants involved in similar industrial activities in countries that include China, India and the Dominican Republic where legal protection is not so great.
While foreign companies dominate the Puerto Rican market, some local companies have set up service operations for the foreign pharmaceutical sector. Foremost among these is Mova Pharmaceuticals, which has assets of $175m. Mova fulfils contracts provided by the pharmaceutical giants while other local companies provide services like packaging and plastic moulding components. Local companies also manufacture medical devices. Mr Ramirez-Rangel hopes this sector will grow, and wants the government to encourage it further. “We have a challenge and we should aspire to have companies like Mova, and companies making their own branded products. We have to stimulate it.”
While Puerto Rico’s political and cultural links are closest to the US, the country’s investment agency believes that it needs to turn its attention to other centres for funds. It is particularly focusing on Europe. Mr Ramirez-Rangel says: “Europe is a great challenge.” He even claims that the island’s tax status favours European investors over American ones. “We can provide better tax advantages for European companies than US companies. EU companies can organise a subsidiary in the Netherlands and the subsidiary in the Netherlands can organise a subsidiary in Puerto Rico. Puerto Rico taxes the profits generated out of the Puerto Rico operation at the advantageous terms that we offer and that money can be repatriated through the Netherlands and back to the parent company, as long as it is an EU company, without the imposition of further taxes. When the American company transfers its profits to the mainland from Puerto Rico, it pays taxes at the tax rates appropriate for a dividend. EU companies have a more advantageous structure because of EU laws.”
The Puerto Rican Development Industrial Company says it is seeking out EU companies who are interested in selling to the US market. “We need to work out of Europe. We have an office in Madrid, and we should have one in Brussels or Frankfurt. Europe is a great challenge for Puerto Rico and we should take it on. We are going to devote a larger share of our promotional resources to Europe over the next couple of years.” Mr Ramirez-Rangel can be assured that any offer he makes to European industrialists to test the warm climate and pleasant environment – as well as the fiscal incentives – will be eagerly accepted.