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Foreign direct investment (FDI) inflows to Costa Rica reached $3.7 billion in 2022. This information regarding foreign investment in Central America was presented in a report by the United Nations Economic Commission for Latin America and the Caribbean (ECLAC) on July 10, 2023. Recent data demonstrate that reinvestments of existing companies and the medical device sector have played a substantial role in this growth in FDI.
Costa Rica is a magnet for foreign investment in Central America
Costa Rica established itself as Central America’s primary recipient of foreign investment. The country has reached the highest flow in the region for three consecutive years. This is according to the annual report entitled Foreign Direct Investment in Latin America and the Caribbean 2023, which was presented on Monday, July 10, by the Economic Commission for Latin America and the Caribbean (ECLAC).
Last year, capital inflows and reinvestments in Costa Rica reached $3.7 billion; in 2021, the figure was $3.5 billion. These amounts exceeded the $2.5 billion that entered Panama, a country that ranked second in 2022, and the $3.5 billion received by Guatemala. in 2021.
The executive secretary of CEPAL, José Manuel Salazar Xirinachs, explained that Costa Rica experienced a slight growth of 2% from 2021 to 2022 but stressed that it remained in the lead for foreign investment in Central America. In addition, he added that Guatemala registered a more pronounced fall due to an exceptional result in 2021, although it eventually returned to its historical levels of investment.
Salazar Xirinachs expressed that Costa Rica’s success in bringing investment to Central America has to do with the fact that the country has solid foreign direct investment policies and systematic programs in place to promote the country.
Reinvestment of profits is a significant portion of new FDI
According to the report, regarding the components of FDI in Costa Rica, the reinvestment of profits (companies already installed in the country and that reinvest additional money) was the one with the most significant weight, with 71% of the total and a growth of 30% compared to 2021.
On the other hand, capital contributions concentrated 18% of the total, and loans between companies represented 12% of the annual record. However, both dropped 28% and 39%, respectively, compared to the data for 2021.
Salazar Xirinachs highlighted the importance of having a “critical mass” in the country, referring to the medical device sector. Medical devices make up Costa Rica’s main class of export. The country is home to more than 50 multinational companies in its national territory. Costa Rica has attracted many medical device manufacturers due to its skilled workforce, favorable business environment, and proximity to major markets. The country has established itself as a prominent player in the medical device industry in Latin America.
In fact, Costa Rica stood out as the leading destination for foreign investment in Central America and Latin America in the medical device sector. It successfully attracted 52% of the total amount, according to the annual ECLAC report.
In addition, the executive secretary of ECLAC emphasized the growth of the services sector, which represents 25% of Costa Rican total exports. He explained that once a critical mass of multinationals is established, the reinvestment of profits by these companies becomes one of the main drivers of economic growth and foreign investment in Central America.
As a result of this dynamism, most of the investments were directed toward the manufacturing sector (68% of the total). This result was due mainly to the behavior of the medical devices sector, while investments in services represented the remaining 32%.
According to the report, the United States is the origin of most of the investments received by Costa Rica, with 73% of the total. The country’s advantageous geographical location mainly explains this. There was also an increase in investments from Switzerland (9%), as well as from other countries such as Colombia (3%) and Mexico (2%).
Growth in Latin America and the Caribbean
At the regional level, in 2022, $225 billion of foreign direct investment (FDI) entered Latin America and the Caribbean. This figure is 55.2% higher than that registered in 2021, and the highest value since records have been kept, according to the ECLAC report.
This dynamic is consistent with the recovery after the pandemic and responds mainly to the increase in FDI in countries like Brazil. It is also due to the growth of all the components of FDI, especially the reinvestment of profits and the rise in FDI in the service sector.
Since 2013, FDI inflows in Latin American and Caribbean countries have been at most $200 billion. The weight of these flows in regional GDP also increased in 2022, reaching 4.0%. Brazil was the leading country, with 41% of the total, according to the ECLAC document.
The executive secretary of ECLAC emphasized that there are incentives that promote FDI in the countries of the region, including effective development policies in the area of science, human resources, and cluster initiatives, as well as the need to strengthen FDI agencies and the creation of incentives such as special economic zones, among others.
This year’s ECLAC report comes at a particularly turbulent time for Costa Rica regarding investment attraction policies.
President Rodrigo Chaves’s government decided on May 3, 2023, to unilaterally break the agreement to attract foreign investment through the Costa Rican Coalition for Development Initiatives (CINDE). CINDE is a private, apolitical, and non-profit organization that advises and guides international companies to establish or expand their operations in Costa Rica.
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