Costa Rica has attracted significant foreign direct investment (FDI) over the past few decades, making it a major driver of the country’s economic growth. With its political stability, skilled workforce, and geographic advantages, Costa Rica has become a hub for high-tech manufacturing and services. Multiple factors have contributed to the rise in FDI in Costa Rica. The government enacted policies to attract multinational companies, offered tax incentives, and invested in education. It also signed free trade agreements which provided access to major export markets. Costa Rica’s membership in the Central American Free Trade Agreement expanded its exports to the United States. As a result, Costa rica foreign direct investment increased from $210 million in 1990 to $3.1 billion in 2019. Foreign companies invested in the technology, medical devices and financial services sectors. Intel, Abbott Laboratories and Bank of America are among the major companies with operations in Costa Rica.
Government policies drove FDI growth in Costa Rica
The Costa Rican government implemented several policies starting in the 1990s aimed at attracting foreign investment. It offered tax holidays of up to 12 years and created free trade zones with exemptions from duties and taxes. These incentivized multinational companies to set up export-oriented manufacturing facilities. The government also invested heavily in education, developing a skilled workforce that could fill high-tech jobs. Costa Rica’s political stability, lack of corruption and sound legal protections made it appealing to foreign investors. Signing CAFTA expanded access to the U.S. market, Costa Rica’s largest export destination. This motivated companies like Intel, HP and Amazon to establish major operations in Costa Rica’s free trade zones. The steady rise in costa rica foreign direct investment reflects the success of government policies in transforming the country into an FDI magnet.
Multinationals diversified Costa Rica’s exports
The influx of FDI diversified Costa Rica’s exports which previously relied on agricultural commodities. In the 1990s, the technology sector became the largest recipient of FDI. Intel built a microchip assembly plant in Costa Rica in 1997, its first outside the U.S. Medical device companies were also drawn by incentives and the skilled workforce. Abbott Labs, Baxter and Hospira have plants exporting IV bags, surgical equipment and pharmaceuticals. Services FDI expanded too, especially in the areas of business process outsourcing, software development and finance. Multinationals now account for over half the country’s exports, led by medical devices, electronics and business services. Whereas agricultural products made up over 60% of exports in 1990, high-tech goods are now dominant. The diversified export base helped Costa Rica develop a more advanced economy and reduced its vulnerability to commodity price swings.
FDI boosted productivity and wages in Costa Rica
Foreign investment raised productivity levels in Costa Rica through the transfer of technology and management expertise. Multinational companies introduced advanced production techniques and equipment. They also provided worker training and built supplier networks, with spillover benefits to domestic firms. FDI contributed to rising income levels in Costa Rica. According to the World Bank, wages in foreign firms were on average 1.7 times higher than domestic companies in 2015. Wages have especially increased in high-tech sectors that have seen large FDI inflows. Additionally, rising employment at multinational companies boosted tax revenues for the government to invest in infrastructure, health and education.
Costa Rica faces challenges in sustaining FDI growth
While Costa Rica remains an attractive destination, sustaining high FDI growth presents challenges. With rising wages, the country has lost competitiveness to lower-cost locations. Stricter environmental regulations have also discouraged some manufacturing FDI. The government is evaluating ways to attract higher value-added services and technology FDI. Upgrading transport and power infrastructure is crucial too. Declining global trade may affect export-oriented FDI in the future. But Costa Rica’s advantages, including an educated populace and stable democratic institutions, can help overcome hurdles in retaining foreign investment.
Costa Rica utilized policies and trade pacts to successfully attract export-oriented foreign direct investment since the 1990s, making it a key driver of the country’s economy. Sustaining high FDI will require shifting the focus to higher value-added sectors and upgrading infrastructure.