FDI Profile of Costa Rica
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, direct investments originating from Europe have been acquiring a growing importance due to the large investments carried out by Dutch and German corporations in both the tourist sector and the food and beverage industry during 2002 and 2003.
FDI by country of origin
With respect to the sectoral distribution of foreign investments in Costa Rica, the importance of the manufacturing industry must be underlined, as its share in total FDI was of almost one-third in 2006, followed by the financial services sector, which has been acquiring importance (relevance) during the last few years. On the other hand, investments in the agricultural industry have followed a downturn pattern revealing a disinvestment behavior.
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List of established companies
FDI contribution to domestic economic development
As is broadly accepted worldwide, foreign direct investment conveys a series of tangible and intangible benefits to those countries that are able to attract and maintain it:
Complement to domestic savings
Economies as a whole can allocate their income to consumption or savings. These savings are in turn routed to investment projects through financial intermediaries (whether local or international). However, in some countries savings generation by local economic agents is often not enough to finance investment being then necessary to attract resources from abroad to complement for this shortage. FDI helps to overcome this difficulty and hence helps finance economic growth.
Source: CINDE, based on Central Bank statistics
As shown by the previous chart, during the last few years the savings rate has fluctuated between 6% and 13% of the GDP, which could be considered a low rate if compare to certain industrialized countries, whose rates fluctuate between 30% and 40%.
Financing the deficit on the current account
FDI currently finances nearly two thirds of the total deficit on current account, a circumstance which provides great strength to the economic stability of the country and has contributed to the reduction of the perceived country risk.
Source: CINDE, based on Central Bank statistics
Foreign exchange generation with low volatility
FDI is not just any financing channel but a clean source of financing, as it is much more anchored to the host country than portfolio investment flows that respond to short term speculative considerations, and therefore it reduces the volatility of the incoming capital. In this sense, some authors call the portfolio investment flows as "bad Cholesterol" since they respond to speculative short-term considerations and the fast depletion of these flows can create or deepen currency difficulties to the recipient country. On the contrary, FDI can be considered as "good cholesterol" since it is much more anchored to the host country.
FDI located in Costa Rican free trade zones is notable for providing more than 50% of the country's exports, compared to 10% just 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 to basic export commodities risk.
Source: PROCOMER
Employment creation
The creation of direct employment through FDI companies during the last decade, which to a great extent are located in the free zones, has been very significant. In this respect, the free zones currently generate nearly 43,060 jobs, which doubles the amount of jobs created 10 years ago.
Source: PROCOMER
Technology transfer
Creation of Productive Links
Although it has not become a generalized process yet, the linking of overseas companies with local suppliers represents an additional way through which the local economy can be inserted into the worldwide economy, thus allowing for the extension of the FDI benefits. Local suppliers improve their standards, learn new production processes, and improve their commercial practices through their relationship with FDI companies.
It should also be highlighted that in many countries, FDI attraction 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. Within the western hemisphere, Ireland is a clear example of a development strategy strongly aimed at attracting FDI; indeed, 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 these economies.
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 results-oriented business culture. In fact, as transnational companies themselves acknowledge, they invest time and funds on training in order to create the necessary know-how in their local operation. This in turn 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 and functionally in other areas such as environmental safety and occupational health, where international regulations have been incorporated into local standards.
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Complements the low level of domestic savings
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Finances the Balance of Payments current account deficit
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Generates foreign exchange with low volatility
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Creates more employment
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Transfers technology and know-how
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Develops productive links
The distribution of foreign investment, according to the special promotion regimes in place is also worth illustrating. In this regard, more than half of the total is established under the free zone regime, which is followed in importance by investments that do not use special regimes (i.e. regular companies) and tourism-related FDI that request benefits under the Tourism Declaration regime.
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