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The Costa Rican economic model of attracting foreign direct investment is based upon its geopolitical climate, long-term internal political stability, and human talent. Also, at the heart of the country’s economic success is the Free Zone Regime that offers tax benefits in exchange for investment and employment.
At critical moments that affect the world economy and, during challenging times for public finances, Costa Rica must be extremely diligent and should seek to concentrate on protecting the focus on its economic development and well-being. Although the country is dealing with a significant fiscal deficit and the consequences of the global pandemic at present, the central parts of the Costa Rican economic model must be preserved.
Current circumstances have resulted in a sharp increase in unemployment. In these complicated times, the free zone regime has proven to be a mainstay of the Costa Rican economic model by creating more than 210,000 direct jobs and indirectly benefitting 4,000 Costa Rican small and medium-sized enterprises. It is of the utmost importance to protect this investment regime and take advantage of global trends that can serve to strengthen it.
The Costa Rican model of attracting foreign direct investment is based upon its geopolitical climate, economic context, and human talent and, at the heart of this strategy, is the free zone regime that offers tax benefits in exchange for investment and employment. Both manufacturing and service companies have located operations in Costa Rica to enjoy these advantages, as well as for the political stability and high quality of the nation’s educated workforce. The country has been successful in creating a world-class medical device cluster and an ecosystem of outsourcing and impressive software development services. Even though Costa Rica is not among the countries with the lowest all-in production costs, the country has managed to attract manufacturers and service companies of all varieties.
However, it is necessary to remain competitive so that foreign companies continue to initiate, consolidate, and expand projects in the country.
Despite being a leader in attracting foreign direct investment, the Costa Rican economic model is not totally unique. Other countries have Free Zone systems. Among them are those that offer much lower operating costs and, in some cases, more attractive benefits. These countries represent strong competition for Costa Rica and capture significant foreign investment resources. Thus, Costa Rica must strengthen its system to remain an effective tool for attracting foreign direct investment.
There are four areas through which the Costa Rican economic model can be advanced. With these improvements, the nation will be able to preserve the investment that is already present, thus giving companies reasons to confirm the strategic value of their decision to establish operations in Costa Rica. It is important to take action to forge a strong long-term relationship with these organizations, and at the same time to grow Costa Rica’s reputation worldwide by attracting new stakeholders to settle in the country’s free zones.
Strengthening the Costa Rican economic model
The first thing that Costa Rica must do is maintain its democratic and social stability by continually promoting internal dialogue. All sectors listen should listen to divergent concerns without disrupting the freedoms and rights of others and without causing disruption to productive activities. Institutional and social instability detract from the attractiveness of the country’s brand and calls into question its reputation as a stable investment destination. It is, therefore, necessary to communicate on all appropriate channels with all parties to ensure a continuance of the country’s peaceful and stable social tradition.
Secondly, it is vital to reaffirm the country’s commitment to its free zone regime as it is presently constituted and to provide legal certainty to companies that are already installed in the country. This is in addition to doing so for other firms that are interested in considering Costa Rica as an investment destination.
In the country’s government, there have always been avid defenders of the regime, and there are important players such as CINDE, COMEX, and PROCOMER who are constantly lobbying for the defense of this integral part of the Costa Rican economic model; even as a tool to tackle difficulties caused by the ongoing coronavirus pandemic. As a case in point, certain rules that govern free zones were loosened to encourage telework for companies doing business in them. However, as a country, Costa Rica must unite in its understanding and agreement on the great benefits of this successful economic development tool.
Discussions about eliminating tax exemptions from the regime must be viewed with skepticism. To talk about new taxes on free zones would be to change the rules of the game for the 375 companies that have already opted to make investments in them. These organizations have created thousands of employment opportunities for Costa Rican workers. The economic message that the country projects must be united and strong. Such an approach should be taken to strengthen the Costa Rican economic model and to project security in existing investments, as well as those that are still to be made.
Thirdly, Costa Rica must streamline the processes and time involved in establishing a business. Despite some of the efforts that have been made in this area, the response time of some public institutions can still be made to be more expeditious and customer service friendly. At present, improvements should be made especially in cutting the amount of time that it takes to obtain required permits. Efforts need to be redoubled to enhance the country’s competitiveness. Costa Rica must encourage private participation in diagnostic and execution processes to improve response times. This challenge is present both inside and outside the free zone regime, but it is vital for companies operating under this program to have an open channel with the Directorate-General of Customs, for example. Agile processes are needed to be in line with the demands of the productive sector. Inaction on this issue would constitute an impediment to receiving further foreign direct investment.
Finally, Costa Rica must continue to work hard to train superior human resources. As mentioned earlier in this blog post, human talent is one of the keys to the country’s foreign direct investment attraction strategy. Costa Rica already has a plan in place. Actors such as CINDE, the INA, and the Universities are used to properly train professionals and technicians based on the needs of companies that settle within the nation’s boundaries to take advantage of the Costa Rican economic model.
However, the Costa Rican government should devote more resources to these teaching tasks in the face of the arduous competition in attracting investment and justifying the production costs of the country. Costa Rica must continue to expand the number of people qualified to provide skilled labor to ensure that there will always be the right human resources available to meet recruitment needs.
The Costa Rican economic model is in the midst of negotiating current global opportunities, where the effect of “nearshoring” makes the nation more attractive to American companies. When establishing plants in Costa Rica, companies are closer to their customers in terms of time and geography. This gives the nation a great advantage when competing with offshore manufacturing in Asia. Costa Rica must adequately prepare itself to seize this opportunity.
In conclusion, Costa Rica must focus on strengthening its image as a stable and attractive country for the development of new technologies and services with a workforce comprised of qualified human resources, and, above all, must focus on protecting the free zone regime.
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