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Puerto Rico turns to tech to revitalize the economy

Puerto Rico turns to tech to revitalize the economy

Posted by PanamericanWorld on January 16, 2017

The commonwealth of Puerto Rico is steeped in more than $70 billion of debt that has been accruing for the better part of a decade. The local government’s irresponsible issuance of bonds and the decision by the U.S. Congress to cut corporate tax breaks have contributed to the current fiscal crisis and subsequent exodus of U.S. companies and Puerto Rican citizens from the island.

To make matters worse, the island’s agricultural industry is at a standstill, importing more than 85 percent of its produce. Puerto Ricans also pay two to three times more for electricity than average Americans, due in part to their dependence on oil imports and because the government-owned utility company is plagued with billions in debt.

On June 30, President Barack Obama signed the Puerto Rico Oversight, Management and Economic Stability Act (PROMESA), which creates a committee (consisting of no elected Puerto Rican officials) to oversee the island’s finances. Some have criticized the law as a devolution to America’s colonial past.

Former Governor Alejandro Garcia Padilla lobbied heavily for the bill’s passage and he acknowledged that the commonwealth has a long way to go to recover financially.

As part of its new economic development plan, Puerto Rican officials are looking to technology and entrepreneurship to revitalize the economy, attract its bright minds back to the island and solve the sustainability problems bedeviling the commonwealth.

Attracting businesses back to the island

In 1976, Congress passed Section 936 of the federal tax code, granting U.S. corporations a tax exemption from income originating from U.S. territories. Manufacturers, largely from the pharmaceutical industry, flocked to Puerto Rico to take advantage of these tax breaks.

It was boom time on the island; until the tax incentives phased out in 2006 (Congress voted in 1996 to rescind them), the island enjoyed 28 out of 29 years of economic growth. Since 2005, Puerto Rico has seen negative growth eight out of 10 years and, just as the automotive industry left Michigan, so too fled Puerto Rico’s most prevalent manufacturers — pharmaceutical companies — in droves.

With the exodus of the big corporations, the workers soon followed. Puerto Rico has been experiencing a net population loss since 2005 that accelerated in 2010 as the mainland began to recover from the 2008 recession. According to the Pew Research Center, Puerto Rico had a net population loss to the mainland of 64,000 in 2014, more than double the net loss of 26,000 in 2010. Vice’s Samuel Oakford reported in April of 2015 that “for the first time in history, stateside Puerto Ricans — 4.9 million — outnumber the 3.5 million who remain on the island.”

Puerto Rico is trying to bring back corporations through a series of tax incentives, which have been signed into law since 2008. Two laws in particular, Act 73 (2008) and Act 20 (2012), set a fixed income tax rate of 4 percent for commercial manufacturers and companies exporting services from the island, respectively. A 50 percent tax credit for research and development activity costs has also been instituted under Act 73. According to Puerto Rico Secretary of Economic Development and Commerce, Alberto Bacó Bagué, “20% of the companies that operate under [Act 20] are tech oriented … and the rest have a tech-related component.”

“Technology is certainly one of the pillars of our economic development program,” wrote Bacó in an email to me. “As of today, we have a strong tech cluster with examples like Infosys, a global leader in creating breakthrough solutions that address mobility, sustainability, big data, and cloud computing and Honeywell, with a new EMI (electronic magnetic [sic] interference) research lab that alone will create 300 jobs.”

Bacó also mentioned TruenorthRock Solid and Fusionworks as examples of a burgeoning corporate IT sector.

Fostering entrepreneurship

To buoy the tech sector, Puerto Rico is trying to reinvent itself as a knowledge-based economy that will compete globally in part by creating a thriving entrepreneurial ecosystem.

The 2012-2013 Global Competitiveness Report from the World Economic Forum ranked Puerto Rico third in the availability of scientists and engineers. According to Lucy Crespo, the CEO of the Puerto Rico Science, Technology and Research Trust, a public-private trust aiming to turn the island into a tech hub by 2020, Puerto Rico graduates 22,000 STEM students and 60 to 70 percent leave the island.

“For many years, our schools and universities prepared our professionals to work for someone else,” said Crespo during an interview in the capital, San Juan. “So we didn’t develop a full ecosystem, we didn’t create a culture in which students from the universities thought, you know, gee, how can I become an entrepreneur?”

The trust recently established the Technology Transfer and Commercialization Office to help develop and commercialize intellectual property from the island’s universities and provide income tax breaks for researchers working in their grant program.

Bacó tells me, “While big hitters are important, a new breed of entrepreneurs has flourished, and we have joined forces with our diaspora using their knowledge and network reach to further propel economic growth.”

Parallel18, a startup accelerator in San Juan backed by the trust and the government, has reached out beyond the Puerto Rican diaspora, soliciting help from Start-Up Chile founder Sebastian Vidal.

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