Fact is fact: for the past several decades, free trade zones have proven to be one of the most powerful tools that governments have at their disposal when seeking to attract foreign direct investment, create high-quality jobs, and boost exports. Throughout Latin America, governments have enacted free zone regimes in an effort to lure companies from around the world seeking stable and business-friendly environments in which to operate and serve their international customers.

While many countries have experienced tremendous success, the Costa Rican free trade zone regime has become the Latin American standard by which others are measured. A recent study from Ernst & Young found that businesses operating under the Costa Rican Free Trade Zone Regime account for 15.1% of the nation’s GDP, representing the largest economic impact by free zone companies in all of Latin America.

Costa Rica’s free zone success is no accident. For decades, Costa Rica has developed policies that not only attract companies but also seek to continually invest in human capital and other drivers of high-value investment. Below is a look at several factors that have allowed the Costa Rican free zone regime to become Latin America’s gold standard.

A Free Trade Zone Regime That Delivers Real Economic Impact

If there is one key metric that Costa Rican policymakers understand when evaluating the performance of their free trade zone regime, it is real economic impact. Instead of merely offering tax incentives to companies, Costa Rica has developed an investment climate that supports multinational companies across some of the world’s most sophisticated industries.

The study conducted by EY found that Costa Rica outpaces several other high-performing free zone economies in Latin America when it comes to the contribution made by free zone companies to national GDP. Two of those countries happen to be Costa Rica’s regional neighbors: El Salvador and Uruguay.

“The success of the Costa Rican Free Trade Zone Regime can be partly explained by its evolution from offering fiscal incentives to promote traditional manufacturing to attracting companies that operate in high-value-added industries such as highly specialized services, medical device manufacturing, and other knowledge-based industries,” said Alejandra Arguedas, Tax Director for EY Central America.

That evolution is key. While tax incentives and competitive operating costs are important, Costa Rica has shown a commitment to developing policies that create sustainable investment success by moving up the value chain.

Moving Up the Value Chain: From Labor-Intensive to Knowledge-Based Industries

Attracting investment is one thing. Retaining that investment and encouraging companies to expand their operations is another. Over the last thirty years, Costa Rica has experienced a metamorphosis in the types of companies and industries it attracts.

Labor-intensive manufacturers were (and still are) an important pillar of Costa Rica’s export economy. However, the country has seen tremendous success in inviting companies whose products and services require specialized talent, advanced technologies, and higher value-added activities.

The Costa Rican Free Trade Zone Regime supports industries like:

• Medical device manufacturing
• Advanced manufacturing
• Business process outsourcing (BPO) services
• Shared services centers
• Finance & accounting
• Technology services
• Engineering and R&D
• Life sciences

By expanding into these industries, Costa Rica has positioned itself to reduce risk by diversifying its export economy. Moreover, it has allowed Costa Rica to transition from competing on labor costs to competing on innovation, workforce quality, operational excellence, and institutional strength.

One statistic from the EY study underscores Costa Rica’s ability to compete with far more populous nations. Despite tax incentives and relatively high wages by regional standards, Costa Rica has attracted industries that rely on some of the most highly trained and qualified workers in Latin America.

Talent Continues to Drive Investment in Costa Rica

When asked what makes Costa Rica such a powerful investment destination, executives tend to cite factors such as tax incentives, access to markets, political stability, and low operating costs. However, one of the most overlooked reasons companies choose to invest in Costa Rica is the ability to find qualified talent.

That was true in the past and remains true today. As pointed out by Alejandra Arguedas, “the availability of highly qualified talent continues to be one of Costa Rica’s strongest competitive advantages.”

In fact, the EY report found that Costa Rica has the second-highest average salary of all free zone economies in Latin America. Only Uruguay boasts a higher average wage. However, as several multinational companies will tell you, higher salaries do not necessarily equal decreased competitiveness.

“The qualified workforce continues to be a major selling point when competing for investment,” Arguedas continued. “Investors are willing to pay for top talent and understand that a skilled worker produces more, generates fewer quality defects, innovates faster, and costs the company less in the long run.”

Costa Rica’s competitive advantage when it comes to talent is derived from a number of factors that have allowed the country to build a robust talent pipeline, including:

• Top Universities
• Technical Training Programs
• High levels of English proficiency
• Experience working with multinational companies
• Specialized expertise (engineering, manufacturing, etc.)

Semiconductors: Preparing for the Next Wave of Investment

Costa Rica is not resting on its laurels. Recognizing that future growth and development will be driven by technology-intensive industries, government officials, university leaders, and industry experts are beginning to prepare for the next generation of investment in the Costa Rican Free Trade Zone Regime. By semiconductor, we don’t mean just attracting fabrication plants. There is a myriad of opportunities for companies that specialize in R&D, assembly, testing, design, engineering, software development, and other semiconductor-related activities.

While building a semiconductor ecosystem won’t happen overnight, Costa Rica has already laid the foundation for success by cultivating a robust network of universities, technical training institutions, government agencies focused on workforce development, and private industry leaders who are ready and willing to collaborate on long-term economic planning.

Costa Rican officials recognize that they must also continue to develop the workforce if the country wants to retain its competitive edge.

Exports: Free Trade Zone Companies Are Driving Forces Behind Costa Rica’s Success as an Export Economy

There are many reasons to support and promote free trade zones. However, if you’re like most governments in Latin America, you’re doing so because you understand they have the potential to greatly impact a country’s exports.

Consider this: Costa Rican free trade zone regime companies only make up about 4% of the country’s total workforce. However, they account for close to 60% of Costa Rica’s exports.

Costa Rica also leads Latin America in exports under free trade regimes, accounting for over US$9.5 billion of the roughly US$61 billion exported from Latin American free zone companies.

Why is Costa Rica such an export powerhouse? By partnering with industry leaders and promoting free trade agreements with countries around the world, Costa Rica has developed a strategic advantage that allows companies to efficiently export to North America, Europe, and beyond.

Like medical devices, there are a number of factors that have allowed Costa Rica to become such a successful exporter. The following are just a few:

• Strategic location between North and South America
• Access to both Atlantic and Pacific shipping routes
• Robust logistics infrastructure
• Political stability
• Free trade agreements (FTAs) with the United States, Europe, Canada, China, Mexico, and more

Costa Rica is a Leader in Latin America in Medical Device Manufacturing

When most people think of Costa Rica, they think of ecotourism. When industry experts think of Costa Rica, they think of medical devices. Costa Rica isn’t just a leader in medical device exports in Latin America. The country is also one of the leading production and manufacturing hubs for medical devices throughout the world.

Costa Rican medical device manufacturers benefit from:

• Highly skilled workers and technicians
• World-class manufacturing quality
• Commitment from multinational corporations (many of whom continue to invest and expand operations)
• Robust supplier networks

A culture of continuous improvement

Costa Rica’s talent pool has become so refined that “some global companies choose Costa Rica as the sole manufacturing location for certain product lines,” said Arguedas.

It’s this type of specialization that has allowed Costa Rica to stop thinking about how to compete with countries that have access to low-cost labor. Instead, Costa Rica is focusing on attracting companies that want to operate where they can manufacture highly precise components, rely on world-class quality, and leverage a stable, business-friendly government.

Tax Incentives are Just the Beginning: The Benefits of the Costa Rican Free Zone Regime

When discussing free trade zones with government officials from other countries, one of the most common questions we receive is, “How does Costa Rica recover the cost of lost tax revenue?” The short answer is that free trade zones benefit economies in nearly countless ways.

Benefits of free zones include, but are not limited to:

• High-value jobs
• Better wages
• Technology transfer
• Increased exports
• Supplier development
• Knowledge and skill development
• Domestic purchasing

Costa Rican free trade zone regime companies have played a critical role in developing an entire supplier ecosystem that supports thousands of small and medium-sized businesses. By enabling large multinationals to source locally, free trade zones have benefited Costa Rican businesses at nearly every level of the supply chain.

Closing Thoughts

Costa Rica knows free trade zones work. What sets Costa Rica apart from other countries is its ability to marry incentives with a stable policy environment, dedication to workforce development, and strong institutions. The results are undeniable: Costa Rica’s free trade zone regime companies account for a larger percentage of GDP than those in all other countries in Latin America. They support world-class industries that compete on a global stage. Additonally, they allow Costa Rica to export more than any other country operating free trade zones.