Industrial R&D and Innovation: Sustaining Puerto Rico’s Global Competitiveness

By: James Pérez-Marcano, PhD. Senior Business Development Specialist, Puerto Rico Industrial Development Company

 

This paper recommends public policies aimed at establishing an effective innovation system in Puerto Rico supported by the industrial research and development program.  These recommendations are based on current industry trends, outcomes from the Puerto Rico industrial research and development incentives program, and the experience of the international community in developing innovation capabilities.

 

Innovation and National Innovation Systems

Innovation (industrial) –bIs the implementation of a new or significantly improved product (good or service) or process[1].

National Innovation System – Is the network of institutions in the public and private sectors, whose activities and interactions initiate, import, modify and diffuse new technologies.  This network provides the framework within which governments form and implement policies to influence the innovation process[2].

 

 

Why is Innovation Relevant?

“The knowledge-based economy is an expression coined to describe trends in advanced economies towards greater dependence on knowledge, information and high skill levels, and the increasing need for ready access to all of these by the business and public sectors. Knowledge and technology have become increasingly complex, raising the importance of links between firms and other organizations as a way to acquire specialized knowledge”[1].  Over the past few decades, globalization has established innovation as the means through which to achieve economic development and prosperity. “Innovation provides the foundation for new businesses, new jobs, and productivity growth and is thus an important driver of economic growth and development”[3].  According to the World Economic Forum, Innovation and human capital development are among the most important factors in sustaining competitiveness in the global economy[4,5].

 

Puerto Rico’s Innovation System

Puerto Rico has an emerging innovation system, consisting of a research-intensive public university system[6]; numerous higher learning institutions[7]; several public and private research centers and institutions[8]; business incubators[9]; a strong cluster of high-technology industries[10]; several financial organizations supporting innovation [11]; and government institutions supporting innovation development[12].

 

Despite these capabilities, basic innovation metrics show below average performance for Puerto Rico.  For example, a 2009 study found that Puerto Rico’s R&D expenditure as a percent of Gross Domestic Product (GDP) is approximately 0.45%[13], which is below that compared to the global average of 2.3% for the same year[14].  The total number of Puerto Rico patent filings is far below the US average over the period from 2008 – 2014[15] and the rate of filings is stagnant compared to the global rate over the past decade[14].  Puerto Rico’s most research-intensive institution, the University of Puerto Rico, has confronted serious challenges in the past 5 years, such as endangered federal research funding and serious fiscal issues, among others[17].  A recent study concluded that academic technology transfer and commercialization performance is below US national average for states that invest similarly in their academic research[18].  Despite this, the 2009 study found that the high-tech private sector accounted for 67% of the R&D expenditures in Puerto Rico and projected an increase in the investments made by this sector in subsequent years[13].

 

Industrial Development

Businesses that compete globally are under growing pressure to produce high-value goods and services at ever decreasing costs.  This challenge is addressed by investing in the development and adoption of sophisticated technologies that enable the creation of innovative products and industrial processes of high commercial value.  This innovation-driven business model is consistent among many industry sectors in Puerto Rico and is strongly dependent on technically competent human capital.

 

Puerto Rico has asserted its global competitiveness by sustaining a robust cluster of supply industries, innovation capabilities, and a highly skilled workforce.  As a result, investments from high-technology industries have continued to grow in the last decade despite strong challenges such as Puerto Rico’s fiscal uncertainty, high energy costs, and the expiration of section 936 of the U.S. Internal Revenue Code, among others.  Today, approximately 48% of Puerto Rico’s economy is based on manufacturing (see Figure 1 below), consisting mostly of high-tech industries that export goods and services to global markets[19], and accounting for approximately $1,000 million dollars in direct fiscal revenues[20].

 

PRGDP

 

Industrial Research and Development

The Puerto Rico Industrial Development Company’s (PRIDCO) charter is to attract, sustain and grow industrial operations on the Island.  To this effect, PRIDCO offers and manages the Puerto Rico Industrial Research and Development (R&D) incentives program, based on corporate tax exemptions and credits, designed to spur investments in capacity-building innovations at all stages of the industrial commercialization process.

The Puerto Rico Economic Development Act 73 of 2008 provides a tax credit in the amount of 50% of eligible investments made in industrial research and development on the Island, which is the most significant incentive of the industrial R&D program.  This incentive has impacted a broad range of industry sectors operating in Puerto Rico, such as aerospace, software, apparel, construction, and the bio-industries (pharma, medical devices, etc.).

 

The bio-industry sector has benefitted the most from this incentive, accounting for approximately 67% of the tax credits conferred over the first 5 years of the program since 2008.  During the same time period, approximately 89% of the projects impacted by this credit have been related to the development of new products and manufacturing processes.  This incentive has been very successful in maintaining a technically-current workforce, supporting the establishment of cutting edge and emerging technologies, and in accelerating the introduction of new products to market.  The incentive has been particularly effective in advancing the capabilities of many manufacturing companies on the Island that are making efforts to engage in early-phase product and process development as a key global competitive strategy[21].

 

Recently, the Puerto Rico Industrial R&D program has been focused on supporting late phase development activities that are directly related to the establishment of new businesses and the expansion of existing operations.  The goal is to increase industrial productivity and exports.  Measurable outcomes from this effort include significant capital investments and the creation of primary and secondary jobs.  However, an often overlooked outcome is the generation of significant revenues from corporate income tax, royalty payments, and municipal taxes from supply chain industries associated with the primary investor industry.

 

 

Current Challenges

Puerto Rico has several strong challenges that threaten the effort toward sustainable innovation-led economic growth and development, namely:

  1. Growing migration of professional and academic talent from Puerto Rico.
  1. Weakening academic research programs, infrastructure, and institutions.
  1. Limited financial resources to invest in innovation.
  1. Deficient overall innovation infrastructure.
  1. Poor innovation performance (g.; peer-reviewed publication rate, patent application rates, infrastructure creation and use, collaborations, R&D expenditures, among others).
  1. Nonexistent long-term innovation-driven economic development strategy.
  1. A growing multigenerational workforce, which has posed challenges in Puerto Rico and globally[22].

 

Conclusions

Innovation is key to the industrial development effort because it is currently the business model adopted by all high-technology industries seeking to sustain their global competitiveness.  This sector, which is the largest segment of Puerto Rico’s economy, has been leading the Island’s investments in human and technical capacities to develop and adapt cutting-edge enabling technologies[23].  These are key capabilities in an innovation system according to the OECD[3].  Despite strong challenges and uncertainty, the high technology industries continue to invest in Puerto Rico, which represents unique policy opportunities to facilitate innovation development efforts.  For example, the high-tech industry trend toward establishing technical centers of excellence, R&D departments and facilities creates unprecedented collaborative opportunities for the academic sector, which may lead to much-needed revenue streams and novel academic programs for the Universities.  Therefore, refining current technology-led industrial development programs is necessary to specifically stimulate knowledge flows, human capital development and academia-industry collaborations that leverage the industry sector’s competitive efforts and Puerto Rico’s current emerging innovation capabilities.  This approach is cost effective, affords short- and long-term results, and is consistent with the global trend of establishing public policies with emphasis on productivity and growth[3].

 

Policy Recommendations

Immediate Action

  1. Clearly, define short- and long-term innovation goals and communicate them effectively to all stakeholders and relevant sectors of Puerto Rico’s innovation system.
  2. Catalog incentives and government programs aimed at innovation.
  3. Revise all government programs that invest in innovation (grants, tax credits, exemption, loans, etc.) to require clearly-defined and measurable expected outcomes.
  4. Establish and maintain a system of information that contains a database of outcome metrics (e.g.; peer-reviewed scientific publications, patents, etc.), innovation capabilities (academic research programs, research-intensive academic institutions, private research institutions, research parks, and centers, etc.) and major science and technology initiatives in Puerto Rico. This information is CRITICAL to promote investments, measure the effectiveness of current innovation policies, and support a continuous improvement program.
  5. Design and implement innovation-driven industrial development incentives aligned with global competitive trends, specifically focused on establishing productive capabilities and the development of human capital. Expected outcomes should include overall increased productivity and the development of global competitive capabilities of small and medium-sized companies.
  6. Revise the industrial R&D tax credit to focus key outcomes on OECD recommended metrics, namely, the development of innovative capacities, human capital and knowledge flows.
  7. Harmonize all government efforts focused on innovation, based on common goals and defined outcomes.
  8. Develop strategies with the academic and private sectors to attract and retain human capital. Immediate efforts should focus on reversing the talent migration from Puerto Rico, but also the reduction of turn-over, the effective transition from academia into entry-level positions, and adapt workplace engagement/retention approaches to a multigenerational workforce (Gen X, Millennials, and Gen Z).
  9. Urgently address the University of Puerto Rico’s strong current challenges: endangered federal research funding and serious fiscal issues, among others.

Long-Term

  1. Reform the University of Puerto Rico’s administrative structure to support fiscal self-sufficiency, competitive world-class research, and the agility to develop cutting-edge academic programs and partnerships. The University of Puerto Rico MUST be a key driver of innovation and human capital development.
  2. Develop a long-term economic development plan that is founded on science and technology innovation.
  3. Establish a multi-sector, tri-partisan organization with full accountability, independence, and power to protect and execute the long-term economic development plan.
  4. Revise the Puerto Rico Science and Technology Policy to become a true workable document, harmonized with the long-term economic development plan, in tune with Puerto Rico’s current fiscal reality, and aligned with the experience of the international community on the development of innovation systems.

 
 

About the Author

James Pérez-Marcano, Ph.D., is Senior Specialist in Business Development in the Office of Specialized Industry Services of the Puerto Rico Industrial Development Company (PRIDCO).  Currently, Dr. Pérez-Marcano manages PRIDCO’s Industrial R&D Incentives program, which promotes investments in high technology to increase the global competitiveness of Puerto Rico’s manufacturing sector.  During his tenure at PRIDCO, Dr. Pérez-Marcano has been committed to advance Puerto Rico’s technology-driven economic development efforts.  Dr. James Pérez-Marcano earned his Ph.D. degree in analytical chemistry from Purdue University, where he produced nine scientific publications in peer-reviewed journals and two patent applications on his doctoral thesis work.  His professional background prior to public service includes management; technical support to manufacturing operations; and industrial research and development in the pharmaceutical and consumer products industries.

 
 

References

  1. Organization for Economic Co-operation and Development (OECD), Paris. (2005). Oslo Manual: Guidelines for Collecting and Interpreting Innovation Data.
  2. Organization for Economic Co-operation and Development (OECD), Paris. (1997). National Innovation Systems.
  3. Organization for Economic Co-operation and Development (OECD), Paris. (2015). OECD Innovation Strategy 2015 an Agenda for Policy Action. 
  4. World Economic Forum. (2015). The Global Competitiveness Report 2015-2016. 
  5. World Economic Forum. (2015). The Human Capital Report 2015.
  6. University of Puerto Rico Office of the Vice President for Research and Technology.
  7. Consejo de Educación de Puerto Rico. (2015).  Compendio Estadístico sobre la educación de Puerto Rico 2014 – 2015.
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  1. Lobato, M. (2009). Encuesta Piloto de Ciencia y Tecnología:  Investigación y Desarrollo [Report].
  2. Organisation for Economic Co-operation and Development (OECD), Paris (2016). Gross domestic spending on R&D (indicator).
  3. United States Patent Office. (2014).  Patent Counts By Country, State, and Year – Utility Patents.
  4. World Intellectual Property Organization. (2015). World Intellectual Property Indicators.
  5. MacTaggart, T., et al. (2016). Building a Sustainable University System: A Program of Change for the University of Puerto Rico. [Report]
  6. Lobato, M., et al. (2014). Análisis de la relación entre las actividades de investigación y desarrollo (I+D) en las universidades de Puerto Rico y el desarrollo empresarial. [Report].
  7. Commonwealth of Puerto Rico Office of the Governor Planning Board. (2016). Income and Product: Fiscal 2014.
  8. Informe Anual a la Asamblea Legislativa Sobre el Pago de Contribuciones en el Año Fiscal 2014 de los Negocios Acogidos a las Leyes de Incentivos: Ley Núm. 135 de 2 de diciembre de 1997 y la Ley Núm. 73 de 28 de mayo de 2008.
  9. Source: Puerto Rico Industrial Development Company.
  10. World Economic Forum. (2015). How can firms adapt to a multi-generational workforce?
  11. Informe Anual al Gobernador y a la Asamblea Legislativa Detallando el Impacto de los Incentivos Contenidos en la Ley Núm. 73 de 28 de mayo de 2008: Cierre Año Fiscal 2013- 2014.