The Backbone of the Island´s Economy
Small and Medium Scale Businesses make up 92 percent of all retail businesses and account for 39 to 44 percent of sales in the retail sector
On a stretch of road between the Condado and Isla Verde touristy neighborhoods of San Juan, Loíza Street overflows with restaurants, bars, coffee shops, boutiques, thrift and convenience stores.
A foodie and shopper’s paradise, this string of retail stores or corridor of commerce is part of the vibrant small to medium enterprise (SME) force that has become the backbone of the island’s economy.
In Puerto Rico, small and medium-sized enterprises (SMEs) make up 92 percent of all retail businesses. They account for 39 to 44 percent of sales in the retail sector, according to the Trade and Export Company.
Data provided by the agency also revealed that during the month of May sales in SMEs amounted to $1,148 billion, a slight decrease when compared to the same period last year. At the end of 2018, 41,458 SMEs (companies with 50 or fewer employees that filed payroll reports) were scattered across the island, from a universe of approximately 45,000 retail businesses.
According to The Economic Census, these enterprises provided 48 percent of the jobs in the retail sector in 2015 and created an average of one job for every $115,000 they generated in sales.
While micro, small and medium businesses outnumber large companies, drive job creation, and continue to push the economy even in tight times, experts interviewed by THE WEEKLY JOURNAL agreed that the sector still lacks the government support it deserves to flourish and expand further.
“Small and medium businesses are vital ingredients for economic growth and revival. They are local enterprises with local capital, creating the vast majority of the jobs in the private sector and are full-time jobs,” Entrepreneurs for Puerto Rico President Enid Monge indicated.
She is right. In 2015, the Trade and Export Company prepared a comprehensive report about the situation of micro, small and medium enterprises. The analysis revealed that SMEs accounted for 95 percent of the businesses on the island, added 13 percent to the overall gross domestic product (GDP) and generated 43 percent of all the jobs in the private industry. SME’s disbursed $4,712 billion in wages and their payroll represented 32 percent of the private sector pay.
“Since it’s local capital the money stays here and it gets reinvested,” Monge, the former president of the United Retailers Center (CUD by its Spanish acronym) emphasized.
But it is more than local hiring and reinvesting in their communities, small and medium businesses can be a solution during difficult and uncertain economic times.
“The hurricane spurred SMEs in Puerto Rico. We had a month where the sector grew 67 percent,” said Luis Adorno González, acting director of the Market Research and Economics Division of the Trade and Export Company.
Eight months after Hurricane Maria slammed the island, the Trade and Export Company certified 1,680 small and medium scale enterprises, 732 of which were new businesses. It projected the creation of 5,750 jobs.
“The sector is not growing at the same pace than last year, but it is still growing,” González stated.
Monge explained that after the devastating storm that ravaged the island’s electric grid and communications system, SMEs are going thru a transformative process. “A lot of businesses closed, but others opened with new ideas and offerings. The crisis fostered reinvention and invention. We have developed with the capacity to strengthen the economy.”
David Vergel, an advisor to the Board of Directors of Entrepreneurs for Puerto Rico and third Vice President of the Chamber of Commerce, underscored the importance of the SMEs within the wider context of the local business industry.
“All SMEs are local. Ergo, they are some of the biggest creators of domestic wealth. They don’t create new capital, but prevent capital flight,” Vergel accentuated.
“Local businesses, which in their vast majority are SMEs, are the largest employer in the country and the sector is the biggest economic contributor to the economy,” he added.
Last year the firm Estudios Técnicos revealed the findings of a study about the social and economic impact of local businesses in Puerto Rico. Commissioned by Entrepreneur for Puerto Rico, the survey discovered that 96 percent of all business on the island is local. They generate 83 percent of jobs and account for 68 percent of the GDP. Retail businesses were the number one creator of jobs and the third sector of the economy.
Yet the playground is uneven.
“Local businesses are the biggest creators of jobs and help reduce inequality. We have economic inequality because business inequality exists,” pointed out Vergel.
For example, he argued that economic incentives and tax breaks favor big foreign companies. “A multinational (company) does not pay property taxes, nor does it pay inventory tax… Companies like Walmart export their capital, but companies like pharmaceuticals and local businesses create capital for the country.”
Aside from access to incentives or tax breaks, Monge also mentioned that small business owners face other bureaucratic hurdles. “It is an uphill battle. Many get discouraged.”
Last week a young entrepreneur that opened an ice cream parlor on Loíza Street told THE WEEKLY JOURNAL that she had to hire a private agent to navigate through the permit process.
“It is not so much the money, it is equal conditions. We want a leveled playing field… It is not about giving more to those who have more. It is about creating fair competition conditions,” Monge insisted.
Kenneth Rivera Robles, the former president of the Chamber of Commerce, agreed that these businesses are all too often overlooked by policymakers and, yet, are a fundamental part of the economy.
“It is a lot easier to help develop SMEs than bigger companies like Walmart and Lufthansa,” Rivera insisted.
The lawyer and CPA also noted that the impact of SMEs could be underestimated due to the complexities of the sector. Rivera, for instance, said that the number of small and medium-sized enterprises would be significantly higher if informal SMEs were included.
SMEs are not only good for the island, but these enterprises also play a major role in most economies, particularly in developing countries. Formal SMEs contribute up to 60 percent of total employment and up to 40 percent of national income in emerging economies, according to the World Bank.