SMEs are key to Innovation in Costa Rica

The Capacity for Innovation in Costa Rica

In its history, Costa Rica has made decisions as a country that can be considered innovative in its context. It implemented compulsory and free education in 1869. It abolished the death penalty in 1882 and enacted critical social reforms in the first half of the twentieth century. Furthermore, the growth of the public university system began in earnest in 1940. This was followed by the abolition of the army in 1948 and the creation of the national park system in 1970. It is challenging to imagine what Costa Rica would be like today without these decisions, which constitute crucial foundations for its citizens’ sense of nationality.

As regards more immediate history, innovation in Costa Rica led to the 1990 Free Zone Law. To this, the country’s leadership established business promotion agencies that include Comex, Procomer, and Cinde. Within the framework of Costa Rica’s democratic society, these organizations create the necessary conditions for national and foreign multinationals to meet the needs of their global clients in strategic sectors, such as advanced manufacturing and specialized services. This is achieved with the support of qualified labor and small and medium-sized Costa Rican companies (SMEs). According to Procomer, in the last decade, the country’s exports of goods and services have doubled from $8.5 billion to more than $17 billion. Thanks to successful industrial promotion efforts and the Free Zones Program, Costa Rica has attracted significant multinationals to set up operations in the country over the last three decades.

Innovation in Costa Rica Begins with SMEs and Start-Ups

Despite the success of opening the economy to the world through free trade agreements with the leading international markets and the high investment in education, the country continues to have significant challenges in the infrastructure and focus required to scale innovation in Costa Rica. This makes the process related to creating start-ups less than streamlined.

However, there needs to be more communication between the innovation system actors to point out shortcomings in this area of the economic ecosystem to make improvements.

Most SMEs need to improve processes, quality, and financial stability, generating inefficiencies and challenging their growth.

Significant barriers still exist that make it difficult for start-ups to access market information, venture capital, and best practices in incubation and business acceleration. Moreover, with this knowledge, access to financing could be more consistent since the same financial institutions (from banks to private investors) seek proof of the company’s maturity and the clarity of its value proposition to assume the risk of giving it funds.

There are also limitations in the innovation processes and the entrepreneurial spirit essential to develop companies with high growth potential, high productivity, and robust generation of quality employment. According to the 2020 innovation index, Costa Rica is the third most innovative economy in Latin America, surpassing Chile and Mexico. However, the size of the Costa Rican market is limited, making the process of internationalization and attraction of risk capital a challenging proposition.

On the other hand, it is essential to pay attention to the efforts made by the country’s public sector. Costa Rica is one of the few countries with several parties involved in its national innovation system. The entities that are engaged in spurring innovation include a “Ministry of Innovation” ( Micitt and, more recently, an innovation promoter. Added to this is the INA, the country’s National Learning Institute, which trains, advises, and promotes business initiatives. Also, taking part in the effort is a governing ministry for SMEs, whose law authorizes it to create public policy, monitor the innovation initiatives of other institutions, and facilitate inter-institutional articulation. This is in addition to the many initiatives dispersed in various institutions.

Costa Rica must act with the necessary force to enable domestic SMEs to develop, sustain themselves in the market, grow, and expand to international markets. The issue is not a lack of initiatives related to innovation in Costa Rica. Still, they must better articulate with each other and be comprised of a “systemic 360″ approach that can benefit these SMEs. This is evidenced in the disarticulation between effective programs and policies and the different institutions’ design and operationalization of these programs. In addition, there is a need to differentiate between subsistence microenterprises, traditional enterprises, technology-based start-ups, or companies with high growth potential.

Innovation in Costa Rica for the Next 50 Years

If Costa Rica wants to solve big problems, it must focus on a few things. First, just as Costa Rica made the courageous decision to concentrate on coffee to insert itself into the world economy shortly after its independence, contemporary Costa Rica must make a firm commitment to innovation led by national and foreign ventures, SMEs, and start-ups in advanced fields such as biotechnology, medical devices 4.0, clean energy, technologies to combat climate change and the creation of content for life in the metaverse.

According to a 2020 International Development Bank (IDB) report on innovation, Costa Rica invests only 0.43% of GDP in research and development, with 2.5% being optimal. But it is even more important to note that the report says, “most of the investment in research and development is carried out by the public sector (76%) and is directed by the curiosity of researchers (87%) and not by its purpose, that is to say, to meet the needs of the productive apparatus”. Therefore, research and development promoting innovation in Costa Rica must be market driven.

In addition to all the specific actions described here, it is urgent to increase the investment in the future of Costa Rica and the pace of its innovation with a constitutional mandate to dedicate 2.5% of GDP to research and development. Additionally, a robust sovereign wealth fund should be established to support the creation and development of start-ups and SMEs in strategic areas to ensure the nation’s future economic health.