Puerto Rico has one of the most dynamic economies in the Caribbean region. US firms have invested heavily there since the 1950s, replacing the once powerful sugar industry as the major employer. Puerto Rico’s exports and imports have prospered, nearly doubling between 1987 and 1997. The island’s duty free access to the US and tax incentives have attracted US investors.

Significant growth

The result of this surge in economic activity is a GDP that reached $74.4bn in 2003, with GDP per head of population amounting to no less than $19,220.

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The island is an important exporter of manufactured merchandise goods, primarily to the US. Manufacturing accounts for 42.1% of the economy and employs 11% of the workforce.

GDP is expected to reach 3.3% in 2004, and economists predict growth of 2.8% in 2005, with medium-term growth of 2.4% in the period 2006 to 2010. Private consumption has increased in line with low interest rates, although unemployment remains high, averaging 12.1% in 2003, having fallen back to 10.8% by May 2004. Puerto Rico’s foreign trade surplus at the end of 2003 stood at $13.8bn.

The eventual development of the Port of the Americas is critical to Puerto Rico’s commercial development. By 2006, this state-of-the-art port is expected to be ready to receive marine cargo for shipping and transshipment to the Caribbean, south and central America, the US and Europe.

Tax incentives

Tax incentives for US-based companies and Federal US transfers have proved critical factors in the island’s industrial development. The maximum corporate income tax rate stands at 7% (for manufacturing and off-island service-related firms), with some qualified companies paying as little as 2%. The 2% special corporate tax rate applies to so-called ‘pioneer industries’.

A 200% super-deduction applies to research and development and job training costs. Investors can take advantage of accelerated rates of depreciation in respect of buildings, machinery and equipment, as well as unlimited loss carried forward. There is a 100% deduction on real and personal property taxes during the initial construction phases of commercial projects, which is extended to include the first-year of operations.

New firms can incorporate in Puerto Rico as ‘controlled foreign corporations’ (CFCs) and receive the tax benefits set out in Section 901 of the US Internal Revenue Code. Puerto Rico’s government has a policy of incentivisation through cutting taxes and encouraging economic development.

Promotion and policy

The island’s government stresses its self-sufficiency. According to the Puerto Rico Industrial Development Company (PRIDCO), operational advantages and what it terms a “value proposition” are set to rank above the tax breaks that are facilitated by the island’s links with the US.

The agreement between the US, Canada and Mexico for the North American Free Trade Agreement (NAFTA) has implications for Puerto Rico because of competition for jobs and investment. Although wage levels are lower in Mexico, Section 30A of the US Internal Revenue code gives US companies in Puerto Rico an advantage in the pharmaceuticals and high-technology sectors.

Key sectors of Puerto Rico’s economy include pharmaceuticals, electronics and processed foods. Sugar production has lost out to dairy production and other livestock products as the leading source of income in the agricultural sector. Tourism is traditionally an important source of income for the island, with some five million tourists visiting annually. Tourism accounts for 7% of the island’s GNP, and the tourism industry employs over 60,000 people.

Major players

A key selling point for potential foreign investors is the island’s skilled workforce, with Puerto Ricans sought out by such leading US institutions and corporates as NASA and Hewlett Packard. Hewlett Packard ranks Puerto Rican educational establishments alongside such US centres of excellence as Stanford 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 major US Food and Drug Administration (FDA) field office serves in particular to attract pharmaceutical companies and medical device manufacturers, given the FDA practice of assisting a company to validate its facilities, plant or machinery quickly.

The island’s political and legal structures bring those corporations that rely on sensitive and proprietary technology in their plants under the umbrella of US Federal intellectual property (IP) protection. Federal US IP laws apply in Puerto Rico in exactly the same way as they do in the US, and US Federal courts have jurisdiction to deal with disputes arising in Puerto Rico where appropriate. In the sectors where Puerto Rico is to the fore, the risk of IP theft is said to be a growing concern for companies setting up plants in countries such as China, India and the Dominican Republic. There is a fear that legal protections in those countries are not as effective as those offered in Puerto Rico.

Pharmaceuticals & biotech

Puerto Rico has benefited from the global demand for biotechnology products. Four leading producers, with a total investment topping $2bn, have established high-value plants there. US biotechnology giant, Amgen, heads the list with a $1.2bn investment, followed by Eli Lilly ($650m) and Abbot Laboratories ($350m). A Johnson & Johnson subsidiary has a smaller operation. Amgen believes that Puerto Rico is the third-largest centre of US biotechnology manufacturing after California and Massachusetts.

With biotechnology thriving, engineering services companies are also relocating to Puerto Rico. A joint venture between Infotech Information Services, an Indian company, and Pratt & Whitney to set up an engineering service sector to provide software development for the evaluation of jet engine control systems has been a landmark event.

Foreign companies dominate the Puerto Rican market, although some local companies have established service operations for the foreign pharmaceutical sector. Foremost among these is Mova Pharmaceuticals, which has assets of $175m. Mova fulfils contracts on behalf of the pharmaceutical industry’s leading players, while other local companies provide services such as packaging and plastic moulding components. Local companies also manufacture medical devices.

Long history of FDI

Puerto Rico started to pursue its industrial and economic development as long ago as 1942, when PRIDCO was first formed to handle the real estate requirements of commercial concerns. PRIDCO was complemented by the creation of the Economic Promotion Administration in 1948, which had the brief of promoting Puerto Rico to the commercial sector. These two agencies were unified in 1998.

The island passed its first Industrial Incentives Law in 1948, a particularly wide-ranging piece of legislation. This provision set the tone for subsequent incentives legislation. It is reviewed and updated every 10 years so as to enable the island to keep abreast of its competitors, and will next be reviewed in 2008.

The establishment of General Electric’s switch-making plant in Puerto Rico in 1956 was a landmark event in the island’s history. The company has strengthened its links with the island and it now has eight plants in Puerto Rico.

The first pharmaceutical company to arrive in Puerto Rico started trading in 1957, followed by Eli Lilly in 1960. During the 1970s and 1980s, many pharmaceuticals companies established facilities in Puerto Rico. Today, 15 of the top 20 of the world’s largest pharmaceutical companies currently have facilities there and as many as 28,000 people are employed in the pharmaceutical sector.