The Central Bank of Costa Rica projects record foreign investment in 2023

The Central Bank of Costa Rica predicts healthy FDI inflows

The Central Bank of Costa Rica (BCCR) foresees that in 2023 and 2024, the country will have a record of foreign direct investment (FDI) that will be directed, especially to the free zone regime. This FDI is driven to a large extent by projects undertaken by companies that are already installed in Costa Rica.

For this year, the Central Bank of Costa Rica projects that the inflow of resources will be $3.6 billion and $3.8 billion in 2024. The resources will be employed chiefly as reinvestment from companies already established in the country.

These amounts are the highest since 2000 when the BCCR began tracking foreign direct investment in the Costa Rican economy.

2021 was the year in which the country recorded the highest amount of money for business investments at $3.2 billion.

Róger Madrigal, president of the Central Bank of Costa Rica, explained that the greater investment in machinery and equipment, transportation and telecommunications equipment in free zones is the main factor in the recovery of gross fixed capital formation, that is, the purchase of fixed assets to improve business productivity.

The BCCR projects that gross capital formation will grow by 5.2% this year, up from 0.8% in 2022. By 2024, the variation in the investment rate will be 4.4%, according to the Monetary Policy Report (IPM) published this past April 30.

Why the higher investment?

The president of the Central Bank pointed out that the significant increase in foreign investment is because Costa Rica is in the process of relocating companies from Asia to the American continent.

This phenomenon is known as nearshoring, which promotes the location of offshore operations closer to their customer markets. These are located mainly in the United States.

This trend began after the Covid-19 pandemic affected supply chains and the production of goods by multinational companies.

“Costa Rica has been one of the countries that has benefited from this phenomenon, but not the only one. We hope it will be a continuous process and is expected to affect both regimes available to investors in Costa Rica. Perhaps the trend will be felt more in the special one (free zones) than the definitive one (companies that income tax),” said Madrigal.

The increase in capital per capita is important to Costa Rica

The Central Bank official also explained that a necessary condition for the development of a country is the increase in capital per capita, which currently occurs in Costa Rica. “It lays the foundation not only for further present but also future growth. This is very positive from the perspective point of view of the economy, and that is why it was desired. The result of nearshoring was that, in 2021 and 2022, foreign investment directed at free zones comprised 74% of the investment inflow. While in the three previous years, the average was 64%, according to Costa Rican Central Bank data.

The resources allocated to the definitive regime, the companies that pay tax on profits, were reduced. As a result, this sector received 3.8% of the $3.045 billion of foreign investment last year, that is, $118 million.

However, in 2018, it was 21.3% of the $2.5 billion brought in during that year, that is, $529 million, according to the bank’s data.

The companies in the real estate, tourism, and financial sectors were the ones that gained traction in receiving resources from abroad, according to data provided by the Costa Rican Central Bank.

Rigoberto Torres, director of Macroeconomic Statistics of the BCCR, explained that the strength of the resources directed to the special regime (free zone) is that it involves reinvestment of the companies’ profits.

“On average, between 55% and 60% of the flows (of investment money) are profit reinvestment. Under this scenario, companies established in the country decide to direct resources to grow their businesses further. This gives FDI flows sustainability,” Torres said.

The economist added that the positive phenomenon in the free zone regime is not limited to companies located there since there is a “spillover” effect towards local companies that provide goods and services to multinationals.

Research by the Central Bank of Costa Rica shows that the greater productivity of external companies located in the special regime positively affects Costa Rican companies.

Local companies that are suppliers to multinationals of the special regime experience, on average, an increase in their productivity of 23% in the fourth year of starting a relationship as a supplier to multinational companies.

While the companies that supply goods and services to multinationals outside the country’s free zones experienced a growth in their production of 4%. This data is according to the study Intangible Benefits of Direct Investment in Free Zones in Costa Rica, published by the Central Bank of Costa Rica. (BCCR).