Costa Rica: The Human Capital Advantage

Interviewing Pilar Madrigal, Costa Rican Investment Promotion Agency. Costa Rica stands out as the only nation in Central and Latin America to have attracted foreign direct investment in manufacturing and services. That distinction seems even more unique, considering that most of this is efficiency-seeking FDI on sectors such as advanced manufacturing, medical devices and services.

Q: What are the unique characteristics of Costa Rica that foreign investors should know about?

A: Costa Rica’s tradition of peace and political stability, as well as a highly qualified labor force has made it a hub for foreign direct investment in specific sectors.

Costa Rica is a country with a population of 4.54 million people and the most stable nation in Central and Latin America. Costa Rica abolished its army in the late 1948, which allowed the government to focus its resources on training and educating its human labor force. This has resulted in the availability of skilled and educated talent for many companies around the world. The government, by constitution, has to allocate at least 6% of the GDP to education. There are 95 technical schools and about 60 universities. All in all, there is a strong focus on the development of the human capital. The secret of our success lies on our policy of investing in the development of our human capital. Today, Costa Rica has among the most talented labor force in the world.

In relation to our economic stability, currently the GDP per capita in Costa Rica is $6,520, almost three times as it was in 1991. Also, we have had a policy of having a very open economy and since decades ago we have pursued the policy of integrating the nation in the world economy and attracting foreign direct investment.

We have signed free trade agreements with the U.S., Canada, Mexico, Chile, the Dominican Republic, Panama, Central America and the Caribbean Community (CARICOM). Currently, there ongoing free trade negotiations with China, Singapore and the European Union. Therefore, these treaties and agreements have helped open our markets and expand opportunities for both Costa Rican businesses and workers as well as for foreign companies that want to use Costa Rica as a hub for services and operations.

Q: Why have multi-national companies chosen Costa Rica for investment?

A: There are about 200 multi-national companies that have chosen Costa Rica for their operations and it is mainly because of our track record. We have a talented and bi-lingual young workforce as we have a number of people who speak both English and Spanish. Furthermore, we have a preferential access to about a third of the world’s population and two-thirds of the world’s GDP; 90% of our goods exported are through our free trade agreements, our business climate, tradition of economic and political stability, as well as a developed infrastructure are other significant factors.

Another key point is that 93% of our energy is generated from renewable sources so we do not have to rely on imported energy sources like crude oil and natural gas for electricity. That translates on a very reliable and cost-effective energy prices. In addition, we have a reliable and advanced telecommunication infrastructure.

In terms of the quality of life, Costa Rica is ranked among the safest countries in Latin America and one of the top five environmental conscious nations in the world.

Q: Can you give us an overview of the various sectors and segments in the economy?

A: It is worth noting that at present 40% of our GDP is high tech manufacturing related. There is a significant change from the mid-80s when most of our exported products were perishable products like banana and coffee while today most of the products are high-tech related.

Our organization, which is a not-for-profit organization, focuses on efficiency-seeking foreign direct investment. Due to the advances made in the Costa Rican in terms of its economy and its availability of talent, the types of industries that have sought Costa Rica for foreign direct investment are specifically three – advanced manufacturing, medical devices, and services.

Foreign direct investment inflows have grown at an average of 22% since 2000. In 2008 we received about $2 billion in foreign direct investment. Foreign direct investment represents about 7% of the GDP and the FDI per capita in Costa Rica is $448 in 2008. Costa Rica ranks 2nd in Latin America in both indexes.

Q: How has the services sector grown in recent years?

A: The services sector is one of the most dynamic sectors right now. In 2000 we had five multi-national companies with their service operations in Costa Rica and by the end of 2008 we had 80 companies. To illustrate the growth in numbers, industry went from having 1061 employees in 1998 to 23,830 employees in service-related companies. Hewlett-Packard, IBM, Procter & Gamble, and Oracle are some of the companies that have chosen Costa Rica for their services operations.

The range of services include shared services, back office, contact centers, software development, architecture, design and engineering, interactive advertising and audiovisual design.

What is noteworthy is that even though 80% of the services are given in English, there are companies that are now able to offer some of these services in other languages such as Portuguese, French, Italian, German and a little of Cantonese and Mandarin. So there is a slow evolution into a diversification of language capabilities within Costa Rica.

Q: What are the leading Costa Rican imports and exports?

A: The five top imports in Costa Rica are petroleum-based products, integrated circuits and electronic microstructures, petroleum, automobiles, and pharmaceuticals and medicines. The exports are integrated circuits, computer parts, banana, pineapple and medical devices.

Q: How has investment from Intel helped Costa Rica?

A: Intel had a tremendous impact on our economy since they were the first semiconductor company to set up operations in our country. The knowledge transfer effect helped us develop into a high-tech oriented economy. Intel currently manufactures microprocessors and chipsets and has a total of 4,000 employees, a facility of about 800,000 square feet, and millions of dollars in foreign direct investment. They started operations in 1998 with purely a manufacturing facility. Today they have diversified and today 3% of their employees (about 900) work at their shared services operation which includes human resources, financial and procurement processes.

Q: What are the incentives that Costa Rica offers to the corporations?

A: Costa Rica has a system called the Free Trade Zone Regime which provides companies with tax incentives. The company that meets certain requirements and is able to apply to the free trade zone regime will receive a 100% tax exemption status. The tax exemption includes corporate income tax, capital repatriation tax, import duties, export duties, municipal taxes, and sales taxes.

Costa Rica offers non-direct incentives too. For example, National Training Center (INA) is free for the user and a company can use the courses provided by this training center for only 1.5% of their annual payroll. Even though it is not a direct monthly incentive or a cash incentive, it offers an educational advantage. Last year, the Government invested $89 million dollars and trained 50,000 workers.

Q: What is the Costa Rican policy for the designation of free trade zones?

A: In Costa Rica the free trade zones are actually privately owned and not government owned. The policy is a developer that wants to develop a free trade zone can purchase the land based on their focus or strategic plan. The developer must apply to get the permit to function as a free trade zone, be able to host several companies within its property and have security, among other requirements.

Q: Would you give us some information about expatriates in Costa Rica?

A: As far as Costa Rica is concerned, the ratio of expats to the number of employees that are in the free trade zone companies is very small, almost non-significant. Most of the companies based in Costa Rica have a local manage. In occasion, companies bring a person from abroad to train the employees for a certain amount of time, and then leave the operation to the local manager. A case in point is Intel, which has 4,000 people and about 0.1% of them are expatriates.

Q: How developed is the country’s infrastructure in terms of electricity and highway network?

A: With regards to infrastructure it is important to highlight that in terms of the quality energy and electricity we are ranked number 40 in the world according to the World Economic Forum. There are a number of projects that are open for bidding that are given by concession to develop roads and ports. We are managing the growth of the infrastructure to match the needs of a growing economy.

Q: What are the country’s advantages from a demographic point of view?

A: About 20% of the entire population is between 10 and 19 years old and then 18% of the population is between 20 and 29 so it is in fact a very young population and 67% of the population is actually less than 40 years old.

Q: How many people graduate every year from colleges?

A: About 30,000 people graduate every year. We have four major public universities and 56 private universities in Costa Rica. We have seen graduates from both public and private universities grow at an average rate of 4.1% since 2001. The number of graduates for 2008 was 31,149.

Q: Would you give an overview of your organization?

A: CINDE is a private, non-profit organization founded in 1982 and declared of public interest in 1984. We focus our services in the attraction of foreign direct investment as well on a program called aftercare, which acts both as the liaison for post-establishment services as well as on policy advocacy efforts.

There are 29 people working in the organization with offices in Costa Rica and in New York City. Although we are globally focused, we do concentrate our efforts in certain geographies that match the type of foreign investment we try to attract to the country.

Q: Does the government rely on your agency for seeking foreign direct investment?

A: The government does rely our agency for attracting efficiency-seeking foreign direct investment. We not only have a role in attracting foreign direct investment but we also have a very strong aftercare program which serves as a channel to promote improvements in the investment climate in Costa Rica.

One of our strong focus is on the development of the human capital but also on policy advocacy for the continuous improvement of our competitive environment. Therefore, we have a very close relationship with the government.

Q: What are the ways in which you seek to attract foreign direct investment?

A: We focus our promotion efforts on industry-oriented conferences, trade shows and events of the sectors that we promote, as well as on a direct approach to a pre-defined list of companies that match certain criteria.

We also enhance these efforts by creating awareness through all the channels and sources related to site selection and foreign direct investment.

Furthermore, we host events at least once a year in which we have participation of government authorities along as well as a case study of a company that has established operations in Costa Rica.

Q: What is the reason for having your office in New York?

A: The East Coast is and international hub in which an enormous amount of companies are represented in one way or another.

Q: What are the countries or regions where you see further opportunities to attract businesses to Costa Rica?

A: We have engaged in some proactive efforts in Germany, India and Spain, although every year we evaluate where most of the source of greenfield projects from the sectors that we promote are coming from.

Q: Do you have a presence of mainland Chinese, Taiwanese, or Singaporean companies in Costa Rica?

A: If we are talking about companies of these countries that are looking for efficiencies in Costa Rica, not at the moment. We are in the process of negotiating a free trade agreement with China and Singapore so we believe that in future Costa Rica may be a hub for some of their companies who wish to access the markets in the Americas.

Q: Do you have a free trade agreement with Germany, Spain and India right now?

A: We have preferential access through the GSP-Plus program to Europe depending on the product category. Most high tech products from Spain and Germany would enter the European Union duty free. We don’t have a free trade agreement with India.

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