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Dominican Republic seeks to lure plants from Puerto Rico
Journal of Commerce / March 24, 1999

By Larry Luxner

SANTO DOMINGO -- As merengue music blasts from loudspeakers high above the factory floor, 20-year-old Gavinia Cruz Morillo and her 900 co-workers at the Cutler-Hammer electronics plant in Santo Domingo's Itabo Industrial Park assemble residential circuit breakers for export to Home Depot and other top U.S. clients.

Julio Cesar Aquino, the plant's manufacturing manager, says his 77,000-square-foot complex has been in production since 1992, when Cutler-Hammer, a division of Eaton Industries, bought the operations from Westinghouse.

"Until three years ago, this was functioning as a twin plant," said Mr. Aquino. "We received plastic injection-molding components from a factory in Puerto Rico, while another Puerto Rican factory supplied our metal products. We assembled the breakers here and sent them back to Puerto Rico for packaging and distribution to clients in the United States, Costa Rica, Venezuela and Canada.

"Now, we receive the raw materials, assemble the breakers, package them and send them directly to the client," he said. "It's just easier to do everything here."

It's also a lot cheaper.

With a 10-year phaseout of Section 936 federal tax incentives for Puerto Rico now underway, U.S. multinationals have less of an incentive to build and keep plants there than before. Another factor is that Dominican manufacturing wages average $5-6 a day compared to at least $5 an hour in Puerto Rico and considerably more on the U.S. mainland.

"There's still a fair amount of twin-plant activity. But as Section 936 gets phased out, some of the companies that had twin plants have moved all or most of their operations here," said Jaak E. Rannik, president of Agencias Navieras B&R, a Santo Domingo shipping agency. He says around 40% of the containerized cargo leaving Dominican ports consists of free-zone manufacturing exports.

"A number of health-care companies in Itabo are doing the whole operation here, from soup to nuts. So I'd say that while the twin-plant program was a real shot in the arm for the Dominican Republic, now it's matured and it's even better," says Mr. Raanik. "It matters little to me whether the goods come from Puerto Rico or Florida. They still have to go in and out."

While neighboring Puerto Rico may view the Cutler-Hammer factory as competition for scarce manufacturing jobs, the Dominican Republic -- a poor country plagued by low per-capita income, high unemployment and increasing political unrest -- hopes to attract more of them as quickly as possible.

Luring foreign companies here, in fact, will be a major objective of next week's "U.S.-Caribbean Trade and Investment Forum" in Santo Domingo. The Mar. 16-18 event, co-sponsored by the U.S. Commerce Department and the Dominican government, is to be attended by 350 to 500 people including President Leonel Fernandez, Puerto Rico Gov. Pedro Rossello, Surinamese President Jules Wijdenbosch and the secretary-general of Caricom, Edwin Carrington.

At present, the overwhelming majority of Dominican free-zone exports consist not of high-value electronic components but low-tech apparel and textiles. But that's slowly changing as Mexico -- where wages are even lower -- siphons off apparel jobs from the Dominicans.

Jose Tomas Contreras, general manager of the Itabo Industrial Park, says his free zone opened in 1986 and is considered one of the most modern in the entire Caribbean.

"Apparel is classified as the bottom of the barrel as far as technology. You can teach just about anybody to sew a pair of blue jeans," he says. "You can't say that about electronics or medical devices."

Mr. Contreras, whose free zone represents an investment of $25 million, argues that the twin-plant concept of producing labor-intensive components in a low-wage site like the Dominican Republic and then shipping them to Puerto Rico for final assembly and packaging has long since outlived its usefulness.

"Puerto Rico has no choice but to pay attention to the Dominican Republic if they want to survive. Otherwise, the jobs will go straight to Mexico," he insists. "We feel that Puerto Rico has a tremendous advantage. We're so alike and so close, but unfortunately, the Puerto Rican managers of Section 936 companies have had trouble understanding the twin-plant concept. When they see their operations threatened by relocations, rather than seeking alliances with the Dominican Republic, they focus on defending their turf against anyone and everyone."

Despite the Dominican Republic's huge wage advantages, Mr. Contreras says some manufacturing operations must remain in Puerto Rico. For instance, certain sophisticated processes cannot sustain the frequent power blackouts common in Santo Domingo; also, garments and other items sold to the U.S. military must be assembled in the United States. In addition, the literacy rate in Puerto Rico is far higher than the Dominican Republic.

"I don't think we can seriously expect to get a biotechnology or pharmaceutical R&D firm over here," says William Malamud, executive director of the American Chamber of Commerce of the Dominican Republic. "You need much higher levels of infrastructure and a workforce flooded with Ph.D's."

As of December 1998, nearly 480 companies employed 188,000 workers, mostly women, in 40 industrial parks across the country. Together, they accounted for over $1 billion in 1998 foreign-exchange earnings. About 70% of that revenue came from sewn goods (including apparel as well as shoes), with electronic assembly accounting for most of the remainder.

According to Dominican government figures, foreign direct investment flows rose from $358 million in 1996 to $405 million in 1997 and $635 million last year. The United States is by far the Dominican Republic's main trading partner; interestingly, bilateral U.S.-Dominican trade exceeds U.S. commerce with India, South Africa or Sweden. It currently ranks as the seventh-largest export market in the Western Hemisphere for U.S. goods, and ships more to the United States than Argentina, Chile or Peru.

In addition, the Dominican Republic ranks No. 4 in worldwide exports of apparel to the United States -- surpassed only by China, Hong Kong and Mexico.

But the lack of duty-free entry to the U.S. market for all exports is hurting the Dominican Republic, a member of the Caribbean Basin Initiative.

"You can be a local factory owner in a free zone, and producing on contract for Liz Claiborne or Levi's," says Mr. Rannik. "Next year, the contract is taken over by a Mexican company. The investment stays here, but the jobs leave."

Another challenge is rising political violence in this nation of 8 million people.

In January, government forces acting on orders from President Leonel Fernandez opened fire on a group of unarmed opposition lawmakers and journalists protesting recent proposals that would change the constitution to allow Mr. Fernandez to run for a second term. At least a dozen people were seriously injured in the melee, including the president of the Dominican Senate, who sparked the incident by attempting to break through a police barricade in front of the headquarters of the Dominican Municipal League.

A leading business group, the Nacional Council of Private Industry, later issued a public declaration calling on the country's politicians to respect the laws of the country and resolve their conflicts peacefully.

"This situation, in addition to the embarrassment, affects social tranquility and, as a consequence, damages the investment climate and our image overseas," said the statement.

AmCham's Mr. Malamud says he's concerned about "the perception of risk" in the Dominican Republic, but that the recent unrest shouldn't affect long-term business plans.

"While we're certainly not applauding that episode, we think the underlying fundamentals here are good: strong economic growth and a dynamic free-zone sector," he said. "There still needs to be more transparency in government. We truly believe there's enough of a consensus to move reforms forward."

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