Pellerano & Herrera The Pellerano & Herrera Foundation

Dominican Republic's Investment Climate Heats Up For U.S. Companies

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Located on an island in the Caribbean, the Dominican Republic is a growing destination for U.S. businesses seeking to establish or expand overseas operations. An economically and politically stable country organized as a representative democratic government, it is the Caribbean's largest democratic country. The Dominican Republic had an inflation rate during the past year of only 4.38 percent, and a growth rate significantly in excess of other Central and Latin American states. As a result, the Dominican Republic is likely to continue receiving an even greater amount of U.S. -- and international -- investments for the remainder of this decade. Last year, registered foreign investment in the Dominican Republic exceeded US$1,200 million -- 25 percent greater than in 2000!

Indeed, a recent report by the International Monetary Fund pointed out that "[a]fter suffering a decade of economic stagnation in the 1980s, the Dominican Republic took off in the second half of the 1990s and, with output growing at nearly 8 percent a year, became one of the world's fastest growing economies." In the IMF's view, the Dominican Republic "is a textbook case of a small economy with limited natural resources that, by opening itself to trade and financial flows, has been able to turn its economy around."

Reasons For Growth
There are many reasons for this incredible growth. The country has engaged in substantial economic reform, removed many exchange and trade restrictions, and reduced the government's role in the economy. Since the country joined the World Trade Organization in early 1995, it has accelerated changes to the country's legal system with respect to international trade. Late last year, both Moody's and Standard & Poor's substantially upgraded the country's ratings.

Recently enacted tax incentives, especially in connection with free trade zones, also encourage investment. Among these tax benefits are:

* a complete exemption on import duties for machinery, equipment, spare parts, and construction materials;
* a complete income tax exemption; and
* freedom to repatriate profits on a tax-free basis.

Communication within the Dominican Republic -- as well as to and from the country -- is world-class. Dominican corporations, including a Verizon subsidiary and a Motorola joint venture, have made the country a continental leader in this area; its voice, data, and video systems have a quality second only to the quality in the United States and Canada.

Moreover, the Dominican Republic has an ample labor force, from highly skilled manual workers to sophisticated management and administrative personnel. It should be noted that the country has ratified all international labor conventions, including those relating to discrimination, unions, and child labor. It also participates in international environmental agreements relating to biodiversity, climate change, endangered species, marine dumping, marine life conservation, ozone layer protection, and ship pollution.

The Dominican Republic is a participant in a wide range of multilateral trade agreements, such as the Caribbean Basin Initiative, which was introduced in 1984 to promote trade relations and foreign investment between the Caribbean and the United States. The CBI provides for duty-free import into the U.S. of most manufactured goods and guaranteed access levels for assembled textiles products. The country also enjoys duty-free access to the U.S. markets under the generalized System of Preferences. It participates in the Lomé (now Cotonou) Convention, which opens the door to the European Union market, and other agreements with the Caribbean Islands (CARICOM) and Central America.

New laws -- such as a General Electricity Law, a Fuel Tax Law, and a market values law -- enacted by the Dominican government seek to encourage foreign investment. They have extensively reformed the economy -- and privatized numerous industries.

A foreign investment law, enacted in the mid-1990s, restructured the legal system to make it easier to invest in the Dominican Republic. Among other things, the law opened previously forbidden or restricted areas of the Dominican economy to foreign investment, established uniform treatment of domestic and foreign investors, and eased restrictions on technology transfer agreements.

Broad Investment Possibilities
The country's developing economy and legal system allow investors a broad choice of opportunities -- from tourism and ecotourism, mining, and transportation, to energy, agriculture, technology, electronics and telecommunications.

Growth in free trade zones, in terms of employment, export value, and number of participants, has been particularly impressive. In large measure, this can be attributed to stable regulations, significant tax incentives accorded businesses operating in free trade zones, and the country's geographical proximity to the United States mainland and to Puerto Rico.

The Dominican Republic ranks fourth in the world in the number of free trade zones. Almost half of the companies are owned by U.S. investors; Dominican investors own 30 percent and a large share is owned by Taiwan companies.

The country's free trade zone system now has more than 50 industrial parks, containing over 500 businesses that employ in excess of 200,000 people and yield perhaps twice as many jobs outside the zones. It should be emphasized that the Dominican Republic's free trade zones generated about US$5 billion in gross exports in 2000 -- more than 80 percent of the country's total exports.

Tourism
The Dominican Republic is one of the closest countries to the United States offering beaches and a warm climate. It also is attractive to European visitors. The Dominican Republic has more than 500 kilometers of white, sandy beaches; 31 national parks; four scientific reserves; two historic parks; and two designated ecosystem areas. As a result, the country's tourism industry is one of the most dynamic industry's in the Dominican economy, employing nearly five percent of the country's total work force and generating about half of its foreign exchange. It has the highest room occupancy rate in the Caribbean.

Agribusiness
The Dominican Republic is an excellent location for agribusiness. Traditional agricultural products, including coffee, sugar cane, tobacco and cocoa, continue to show sustained growth. A growing local market and the increasing tourist population create an outstanding investment opportunity for domestic consumption. Close proximity to the U.S. provides flexibility of operations and gives investors an advantage over other competitors in the industry. Skilled and semi-skilled labor is readily available at competitive wages. Boxes, cans and tropical foods are available within the country. Required industrial land is available for development. Companies operating in non-traditional agroindustry are exempted from local income taxes and other taxes. The zero-tax incentive allows agricultural equipment to be imported duty-free. Technology transfer is recognized as an investment. Sea and air transportation for fresh and frozen products is widely available.

Mining
The Dominican Republic has diverse mineral deposits, including the second largest gold deposit in the Americas, and substantial amounts of silver, nickel, bauxite, marble, limestone, and granite.

Additionally, the country has abundant marble reserves, estimated at more than 300 million cubic meters, valued at US$1.5 billion.

The country's mining industry, having increased recently at an annual rate of nearly 30 percent, is another important opportunity for U.S. investors.

The Future
The Dominican government recognizes the value of foreign investment to its citizens, and continues to encourage that investment. The country's investment promotion strategy for the near future reflects its desire to continue to improve its physical and financial infrastructure, to develop human resources through training and education, and to use new technologies. To quote the IMF, "the Dominican Republic made tremendous strides forward in the 1990s and has great economic potential, which it can realize by continuing with its ample reform agenda and meeting the various challenges described above. Given its past successes, the future looks quite promising." American companies interested in overseas investment would do well to investigate the Dominican Republic.