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Foreign direct investments in Costa Rica have been growing considerably during the past 20 years. After the economic crisis dealt with by the majority of Latin American countries, including Costa Rica, in the early 80s, structural policies were implemented that attempted to accomplish a swift economic recovery, some of which included the attraction of investments by transnational companies with a tendency towards exports.

These companies, the majority of which came from the agricultural and industrial (textile and electronics) sectors, created greater dynamics in employment and exports, which at that time redounded in less unemployment and accumulation of foreign exchange to recover the external balance that had deteriorated as a result of the debt crisis.

Foreign investments in the industrial sector have set the standard since the early nineties, followed by other sectors among which agro-industry, financial services and tourism stand out, which have also strengthened in the past few years. The change in the structure of foreign investments replicates the progress in the economic development of the country where the secondary and third sectors acquire greater importance as the economies advance; an aspect that is also reflected in the structure of the productive and exporting baskets, where after being comprised of primary and textile products, they shift to include an important portion of products with a high technological component. In fact, at the present time traditional export products such as, bananas and coffee, have continued their growth in volume and value; however they have shifted from representing 60% of exports to less than 20%. On the other hand, high technology exports represent a fourth of the total, while tourism is now the main source of foreign exchange. The services sector has increased its participation within the GDP to an astounding 50%.

Traditionally, the United States accounts for more than half of the foreign direct investments that take place in Costa Rica, as shown in the following chart. Nevertheless, the investments originating from Europe have been acquiring a growing importance, mainly due to the large investments carried out by Holland and Germany in the tourism sector and the food and beverage industry during the years 2002 and 2003.

In regard to the sectoral distribution of foreign investments in Costa Rica, the importance of the manufacturing industry must be underlined as the principal sector recipient, which grew to 67.12% in the year 2003, followed by services and tourism, which have been acquiring relevance during the last few years, as previously mentioned. On the other hand, investments in the agricultural sector have followed a downturn pattern that even in the year 2003 has revealed a disinvestment behavior.

The distribution of foreign investments, according to the export systems in effect, is also worth illustrating. In this regard, more than half of the latter are installed under the free zone system, and next in importance we find those that are installed under the conventional customs system and the tourism companies that request benefits under the Tourism Declaration special system.

Percentage Participation of the FDI by type of company
	1997	1998	1999	2000	2001	2002	2003
Regular companies	33.69%	25.03%	33.40%	26.45%	24.69%	52.79%	30.91%
Free Zone	45.39%	60.58%	36.41%	55.47%	40.01%	34.14%	54.06%
Tourism Sector	19.49%	10.04%	13.67%	12.75%	24.58%	11.48%	15.31%
Financial System	-0.05%	3.61%	15.08%	6.63%	8.00%	2.99%	0.68%
Special Drawback System	1.47%	0.74%	1.44%	-1.30%	2.71%	-1.41%	-0.95%
Source: BCCR

Source: CINDE, based on figures by the BCCR

Another way to establish the importance on the economy of Foreign Direct Investments (FDI) is to determine its relative importance within the national production. In this sense and specifically in the case of Costa Rica, the relative importance of FDI in reference to the GDP during the 1995-2003 period has fluctuated between 2.9% and 4.3%. The maximum peak value was attained in the year 1998 when with the arrival of INTEL the importance of FDI increased considerably; however, the recession in the United States had significant repercussions on this variable. For the year 2003, the FDI as a percentage of the GDP barely surpassed its 1995 value by 4.1%, thus demonstrating that for the entire period a significant increase has not occurred.

Source: CINDE, based on figures of the BCCR

The Foreign Direct Investment per capita reflects the contribution per inhabitant with each investment executed by the transnational companies that install operations in the country. According to the following chart, the latter moved from $50 in 1991 to $150 in 2003, reinforcing the fact that in the last decade FDI has suffered an important growth.

List of CINDE's companies in Costa Rica

Contribution of foreign investments to domestic economic development

As is broadly accepted worldwide, foreign direct investment conveys a series of tangible benefits of a diverse nature to those countries that are able to attract and maintain it.

Economies as a whole can allocate their revenues to consumption or reserves. At the same time these savings, through financial intermediaries (whether local or international), are routed to financing investment projects by the companies. However, the creation of savings by economic agents is often not enough to finance projects (or consumption in durable goods) thus it becomes necessary to attract resources from abroad that will complement the shortage in internal savings. Thus, FDI helps to overcome the difficulty of the majority of developing countries to create enough internal savings to finance economic growth.

As shown by the previous chart, during the last few years the reserve rate has fluctuated between 5% and 9% of the GDP, which could be considered a low reserve rate if we were to compare ourselves with certain industrialized countries, whose rates fluctuate between 30% and 40%. Therefore, FDI serves as a complement to the low internal reserve rate.

FDI finances nearly two thirds of the deficit on current account, which provides great strength to the economic stability of the country and has contributed to the reduction of the perceived country risk. It is common for the country to be creating a greater absorption than its supply of goods (production), thus it turns to international markets to close that gap in consumption. This deficit must be paid is some way, and FDI is one of the sources that can finance that deficit.

In addition, FDI is not just any financing channel but a clean source of financing since it is much more anchored to the host country than the portfolio investment flows which respond to short term speculative considerations, thus reducing the volatility of the incoming capital. In this sense, some authors call the portfolio investment flows "bad Cholesterol" since they respond to the speculative short term considerations and the fast depletion of these flows can create or deepen the difficulties to the recipient country. On the contrary, FDI can be considered "good cholesterol" since it is much more anchored to the host country.

FDI is notable for being one of the ways in which free zones, even without considering INTEL, generate nearly 30% of the country's exports, compared to 10% a decade ago. It is also very evident that FDI has contributed to the diversification of exports, thus making the Costa Rican economy less vulnerable.

Source of Employment

Additionally, the creation of direct employment through FDI companies, which to a great extent are located in the free zones, has been constant. In this respect, the free zones currently generate nearly 38,000 jobs, which is double the amount of 10 years ago.

An additional means through which FDI generates benefits to the economy is the transfer of knowledge that occurs as a result of the constant training given to the personnel, knowledge that not only refers to the production processes but also a working culture based on achieving results and productivity. In fact, as the transnational companies themselves acknowledge, they invest time and money in personnel training in order to create the necessary know how for its operation with the intention of intensifying its power as a result of a qualified and productive manual labor. It is even a very effective instruction because the workers learn very rapidly. In these processes, a transfer of knowledge and know how is produced, which increases and lingers as a competitive factor for the country. It is also important to highlight that the transfer of knowledge has even shifted to academic centers (universities) and polytechnic centers (INA, university schools, among others), and in other areas such as environmental safety and occupational health, where even the regulations have been incorporated into the international standards

Although it has not become a generalized process, the linking of overseas companies with local suppliers represents an additional way to insert the local economy into the worldwide economy, thus allowing the expansion of the FDI benefits. It is clear that local suppliers improve their standards, learn new production processes, and improve their commercial practices, and which are just a few of the positive effects of their relationship with FDI companies.

It should also be highlighted that in many countries, FDI has been a strategic element of their own development model. This is the case of various Asian countries such as China, Malaysia, Singapore and Thailand. In the western hemisphere Ireland is a clear example of a development strategy strongly consolidated to attract FDI: Ireland achieved growth rates of 8% in the decade of the nineties due to a great extent to the establishment of multinational companies. Naturally, this does not mean that only FDI is required to achieve high rates of growth but there is not doubt that the latter is a fundamental element in the development strategy of the economies.

Overall historical panorama of Foreign Direct Investments in Costa Rica