Costa Rica Guide

 

COSTA RICA
INVESTOR ATTITUDE STUDY

November 1998

Prepared by:
THE OFFICE OF LATIN AMERICA AND THE CARIBBEAN
U. S. Department of Commerce
Washington, D.C.

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TABLE OF CONTENTS

I. Introduction
II. Methodology
III. Executive Summary
IV. Investor Attitudes

A. Economic Climate
B. Legal Environment
C. Government Operations
D. Labor
E. Infrastructure
F. Other

V. Recommendations
VI. Conclusion

APPENDICES

A. Companies Interviewed
B. Questionnaire

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I. INTRODUCTION

This Investor Attitude Study assesses the investment climate in Costa Rica from the perspective of U.S. investors. Comments and recommendations presented in this study reflect the opinions and experiences of U.S. companies with investments in Costa Rica, and should not be considered official U.S. government policy.

This study is intended to provide the Costa Rican Government and private sector with constructive feedback on the experiences of U.S. investors that could be used as a basis for further enhancing Costa Rica's investment climate.

The U.S. Department of Commerce's Office of Latin America and the Caribbean conducted this study under its mandate of fostering trade and investment activities between the United States and Latin America and the Caribbean. This study was undertaken with assistance from the U.S. Agency for International Development through a Participating Agency Service Agreement.

The Department of Commerce is grateful to the U.S. Embassy in Costa Rica, and in particular, to the Commercial Section, for arranging in-country interviews and actively participating in the study.

 

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II. METHODOLOGY

This study is based on interviews conducted with 17 U.S. companies that have investments in Costa Rica (see Appendix A for a complete list of companies interviewed). Interviews were conducted from September 9-16 with the Costa Rican-based managers of the U.S. companies. Most of the major sectors of the Costa Rican economy were represented among the
companies interviewed, as depicted in the table below:

Sector	No. of Companies
Agribusiness	2
Finance	1
Manufacturing	7
Services	7
Total	17

The questions posed to companies solicited their experiences and opinions concerning the major attractions and obstacles to investment in Costa Rica (see Appendix B for questionnaire). The specific responses and suggestions of the individuals interviewed are confidential and will not be attributed to individuals or companies by name at any time in this report.

 

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III. EXECUTIVE SUMMARY

The primary attractions and challenges to investing in Costa Rica listed below are generalizations based on the majority opinion of the U.S. investors interviewed.

Primary Attractions:

Stability - Investors considered Costa Rica’s long tradition of political and economic stability as a key attraction to the country.

Living Environment - Closely related to the stable political and economic climate, the attractive living conditions in Costa Rica, including most of the accustomed amenities available in the United States, make the country appealing for expatriate managers.

Labor - A major factor drawing companies to Costa Rica is the country’s highly educated and productive labor force, increasingly for high-tech operations.

Strategic Location - Proximity to the United States for business travel and shipping, as well as a similar time zone for phone communications, give Costa Rica a comparative advantage particularly over Asian competitors.

Preferential Trade Arrangements - Preferential access to the U.S. market under the Caribbean Basin Initiative (CBI) and to the rest of Central America under the regional common market were important considerations for certain export-oriented investors.

Primary Challenges:

Infrastructure - The primary challenge for Costa Rica to improve its international competitiveness is to upgrade the country’s physical infrastructure, particularly roads, ports, and airports. Although electricity and telecommunications services are considered good, reforms that would permit additional private participation are encouraged to keep these services at the highest possible level.

Public Sector Operations - Investors recommend continued progress in managing the fiscal deficit; streamlining procedures for business in dealing with government agencies; and, as mentioned above, developing the regulatory framework to facilitate private investment in sectors generally reserved for state enterprises.

 

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IV. INVESTOR ATTITUDES

A. Economic Climate

U.S. companies interviewed are generally very supportive of the early efforts of the Rodriguez Administration in managing the Costa Rican economy, and in particular, praised the smooth transition from the prior government of President Figueres, whose term ended in May 1998. Despite coming from opposing parties, the close collaboration between the outgoing and incoming governments, combined with a continuation of the main thrust of economic policy, has made the adjustment period much easier than during past changes in the governing party. U.S. firms expressed confidence in continued growth of the economy. GDP is expected to increase at least 5 percent in 1998, following the 3.2 percent rise in 1997. Inflation is projected to stay at, or just slightly higher than the 11 percent rate last year. A main priority of the new government is to constrain the large public sector deficit and resulting domestic debt, building on the efforts begun during the second half of the previous administration. Approximately one third of the government budget now has to be devoted to servicing the domestic debt, draining resources from development needs. Improving tax collection and reform of the public sector are key to the government’s fiscal strategy.

U.S. investors commented very favorably about the outreach efforts of the Rodriguez Administration to incorporate all segments of society in developing input into policy on key economic and social issues. These "consensus" working groups have been established on issues such as pensions, privatization of state-owned companies, and labor relations. Representatives from government, business, labor, and general civic organizations participate in the process. U.S. companies expressed that this process is especially important in gaining enough support for privatization efforts. The government recognizes the need to privatize or allow greater private participation in sectors traditionally reserved to the state, such as telecommunications, energy, and insurance. However, there is still much popular sentiment that such services are part of the national patrimony and should remain under state control. The government is trying to build consensus and work within the country’s legal system to find the most appropriate ways to move forward. In the meantime, some steps have been taken that should facilitate investment through public concessions, or "B.O.T." - build, operate, transfer arrangements.

The relatively stable economic climate has enabled U.S. investors to adequately plan business operations. Economic indicators have been fairly close to targeted levels, facilitating planning decisions. The Central Bank continues to manage the exchange rate through a "crawling peg" system, setting an advance schedule of daily mini-devaluations that accounts for the expected difference between local and dollar inflation. Companies expressed satisfaction with this system, even though the rate is not set by open market forces. The predictability of the exchange rate, combined with close enough approximation to what the "free" rate might be, has not produced any strong sentiment to change the current system. There is also free access to foreign exchange, and no company indicated any difficulty purchasing dollars or transferring profits to headquarters in the United States.

B. Legal Environment

U.S. investors interviewed noted the strengths of the Costa Rican legal system - a country which enjoys an independent and strong judicial system and an educated population which understands and respects the rule of law. A few companies commented on the increasingly litigious nature of Costa Rican society, where firms and individuals know and often use the full range of legal recourse to address claims and pursue actions, a process which can tend to slow down the normal course of doing business. While U.S. firms expressed confidence in the court system to fairly resolve commercial disputes, the time it takes to adjudicate such claims is a concern. Costa Rica is developing its alternative dispute resolution (ADR) options, and new legislation was enacted in early 1998 intended to facilitate procedures to resolve conflicts through arbitration and mediation. The Costa Rican Chamber of Commerce now has an ADR center and the American Chamber of Commerce in Costa Rica (AMCHAM) is establishing an International Resolution of Disputes Panel, through which the prestige of the AMCHAM may offer an attractive option for dispute settlement.

While property issues have been long-standing legal concerns in Costa Rica, none of the companies interviewed had land or title problems. Although many rented space, those investors who purchased land did not indicate any problems with the ownership process. As long as caution is taken in researching the title and going through proper registration procedures, companies maintained that foreign investors should not be discouraged from purchasing land. In addition, title insurance is now available which greatly reduces the risk of ownership. Most outstanding property issues in Costa Rica have resulted from large amounts of land expropriated for national parks and biologic and indigenous reserves. In addition, land invasions by squatters have been problematic, particularly in the southern Pacific Pavones area. Approximately twenty-five claims by U.S. citizens remain outstanding, with many of the expropriation cases going back to the 1970s and 1980s. The prior Figueres Administration made some effort to resolve expropriation cases (including one sent to international arbitration) and made improvements in the legal framework. President Rodriguez appears committed to continue to resolve outstanding cases, and reportedly will work with the Inter-American Development Bank in making further legislative improvements.

U.S. investors reported that Costa Rica increasingly recognizes the importance of adequate protection of intellectual property rights (IPR) and some movement is underway to improve the IPR regime. The country is committed under the World Trade Organization to bring legislation into conformity with the requirements of the Trade Related Aspects of Intellectual Property (TRIPs) agreement by January 2000. Current shortcomings include the short length of patent term for pharmaceutical products, inadequate penalties for trademark violations, and general enforcement difficulties. A major IPR seminar, the first of its kind, recently took place which advanced the dialogue on IPR issues among key actors in government, business, and the media. The government’s announcement that it will establish a new special prosecutor post for IPR is viewed as demonstrating the Rodriguez Administration’s commitment to improve IPR enforcement.

C. Government Operations

While U.S. firms recognize that dealing with government bureaucracy in Costa Rica can be slow, companies generally perceive that procedures are transparent and fair, considerably more open than in many other parts of Latin America. Establishing a company is a fairly routine process, except in those sectors still reserved to the State. Getting various government approvals or permits can be time consuming (e.g., building permits, utility connections, etc.). Government procurement awards tend to be stretched out because protests are often made by a competing company to the government comptroller’s office ("Contraloria") challenging a decision or protesting a technicality in a competitor’s bid. Companies noted the importance of these procedures in helping to keep the bidding transparent, although encourage efforts to speed the review process.

The main incentive system for investors now is the tax exemptions for operating in an industrial free trade zone. The other programs - export credit certificates and temporary admission regime - have been phased out. U.S. firms interviewed that are based in free trade zones expressed strong endorsement for the system and relatively smooth process in being approved for the tax benefits and the improvements made in simplifying government reporting requirements. In addition, U.S. investors are strongly supportive of changes to the free trade zone regime that are currently making their way through the legislature. The proposed changes include extending the period of income tax exemption for companies that make additional investment, increased benefits for investments in less developed regions, and provisions to allow some domestic sales.

Companies report improvements in the operations of Costa Rican customs, although further streamlining of procedures would be welcomed. Documentation is increasingly computerized which speeds up the clearance process. Occasionally a shipment is delayed clearance, but most companies still noted the system works better now than in years past. Firms located in free trade zones have few difficulties with customs and cite the benefits of having inspectors on site.

According to U.S. investors, the government investment agency, PROCOMER, has become more efficient since being reorganized in the last couple of years. Companies noted the improved general support and assistance for investors, as well as changes simplifying registration procedures and reporting requirements. In addition, the private, non-profit organization, CINDE, was highly praised by several of the interviewed companies for its efforts in promoting foreign investors to Costa Rica and for working with the government in support of issues of concern to business (e.g. privatization, intellectual property protection).

D. Labor

The Costa Rican labor force is considered a major attraction for U.S. investors. The population is highly literate and well educated. The government has long placed a high priority in investing in public education, including the university system as well as technical and vocational training. The country enjoys a significant number of engineers and other professionals. In addition, workers are considered very trainable and productive. Costa Rica’s main comparative advantage for attracting high tech investment is that the country can provide sufficient qualified professional and technical personnel and at costs well below "developed" countries and often below what are increasingly becoming competitor countries in Asia. Although the recent surge in high tech investment has placed some strain on available labor resources, there are still good opportunities for growth, particularly with the expansion of educational programs to meet future needs. In "lower" tech industries, although Costa Rica’s wage rates are higher than many regional competitors, higher labor productivity and modern manufacturing techniques can often compensate for labor costs.

Unions only have a significant role for public sector workers. The main form of labor organization in private companies is the "Solidarity Association," which employers support through a credit union and other assistance services. U.S. investors seem very satisfied with the operation of the solidarity associations, commenting that they tend to work with the company, not against it. The associations have not been confrontational or used to negotiate wages. Some companies have a separate permanent council of employees, serving as a mechanism to bring up complaints and problems, which has generally functioned very well.

Several companies mentioned issues regarding the main labor code, which dates back to the 1940s, that should be addressed, particularly to allow more flexibility over work schedules. The labor code requires overtime pay (time and a half) after the statutory eight hour work day as well as for shifts which extend past 10:00 pm. One investor, for example, considers it essential to maximize efficiency by keeping the plant open 24 hours using two 12 hour shifts (four days on, four days off). In order to do this (without paying overtime rates), special authorization was needed by government decree. Another investor, which operates two shifts -- day and late afternoon/evening -- ends the second shift at 10:00 pm so not to have to pay overtime. Instead, the extra few hours are made up on Saturday (a sixth work day for those on the second shift) at regular pay rates. Companies would seem to be willing to a pay at a premium if need be to implement alternative work schedules, but not at the required time and a half.

Several investors commented that improvements for workers could be made in the retirement system. The Rodriquez Administration is currently reevaluating the social security pension system through one of the "consensus" groups. In addition to the pension, workers also receive severance pay of one month’s salary for each year employed at a company, up to eight years. Investors support efforts to develop tax incentives or other mechanisms to encourage worker retirement savings. For executives and managers, various pay packages including stock options, specialized pensions, and other compensation items, while at one time very limited, are now becoming increasingly utilized in Costa Rica.

E. Infrastructure

All the U.S. investors interviewed clearly identified Costa Rica’s physical infrastructure as the main challenge for the country as it continues to modernize the economy and tries to compete with more developed nations around the world. Even in a Latin American context, many other countries have made further gains in recent years in improving infrastructure. The Rodriguez Administration recognizes the needs and has placed high priority in allocating available resources for public infrastructure projects, but also in developing legislation and other mechanisms to enable private investment in infrastructure.

The best infrastructure services are provided by the state telecommunications and energy company, ICE, which has long been a source of pride by the general population. However, there is consensus by U.S. investors (and increasingly by the overall business community) that although ICE may have served the country well in the past, greater private investment will be needed to modernize services. Most U.S. investors are generally satisfied with existing telecommunications services, although there can be a long delay to get a telephone line installed, costs could be more competitive, and cellular service is at times erratic. The main concern, though, is if the country is going to be successful competing in the high-tech world, the investment and technology needed to keep telecommunications at the cutting edge can best be acquired through private participation. On the energy side of ICE, more has already been done in allowing private investment through arrangements whereby privately-owned power plants can sell generated electricity back to ICE. However, limits on the amount of installed electrical capacity permitted in private plants, as well as continued monopoly in the transmission and distribution of electric energy, have kept costs relatively high. Supply is generally reliable, although occasional outages do occur.

Costa Rica’s road network needs major upgrading. In San Jose, traffic congestion and poorly maintained roads, make commuting and transport of goods difficult. The roads out to both the Pacific and Atlantic coasts add extra time and expense in trucking goods to and from the ports. One investor commented that company trucks are not sent out at night since it is harder to see the many potholes that could damage the trucks and merchandise. In addition to facilitating commerce in Costa Rica, improvement’s in the country’s road system would also contribute to future growth of tourism, which has already become a major segment of the economy. In early 1998, a new public concessions law was approved which enables private companies to construct and manage highways and bridges. The first few of these B.O.T./B.O.L. (Build, Operate, and Transfer/Lease) concessions are currently being bid, which should at least start to make some improvements to the road network.

Costa Rica’s airport and port facilities are also in need of significant upgrading. Rapid growth of international passenger and cargo traffic has stretched the limits of the main airport, Juan Santamaria. This pressure is expected to accelerate, particularly with the surge in exports of electronic products. The government has recently solicited bids for a private operator to manage the airport for a 15-year term, including an estimated investment of $175 million for infrastructure improvement. Successful implementation of this concession contract should help alleviate congestion over the short-term. The government is also considering a longer-term solution, in part based on a study financed by the U.S. Trade and Development Agency, to eventually build a new international airport for San Jose.

U.S. companies that have cargo shipped in and/or out from the main ports - Limon on the Caribbean coast and Caldera on the Pacific coast - commented on the relatively high costs compared to ports in many other countries in Latin America. Congestion at the ports is a problem due to inadequate facilities, public labor unions able to cause frequent work stoppages, and preference (at Caldera) for passenger cruise ships. Some modernization work is underway at Limon, although the contract for a new Swiss crane has been delayed nearly a year over insurance issues. Improvements at Caldera have largely been postponed because of budget constraints.

F. Other

Crime/Security

Traditionally, Costa Rica has been considered a very safe country. Over the years, there has been an increase in crime, mostly non-violent thefts and break-ins. U.S. companies operating in Costa Rica are taking more precautions to make adequate security arrangements. However, all the companies indicated that the security situation is manageable and should not deter investment in the country. In fact, the security environment is still considered a very positive factor in the country’s investment climate.

Finance and Insurance

Although Costa Rica does not have a well developed capital market, some changes have been made in recent years to strengthen the banking and financial system. Still, virtually all the investments made in Costa Rica by the U.S. companies interviewed have been financed using the companies’ internal resources or by international financial institutions to take advantage of lower interest rates than available locally. In some cases, though, U.S. investors have relied on the local banking system for short-term working capital requirements. Overall, banking services in Costa Rica have improved over the last couple of years spurred by the introduction of private competition for checking and savings accounts, formerly under state monopoly. Insurance, though, is still under a state monopoly - the National Insurance Institute (INS). U.S. investors commented on the relatively high costs for insurance in Costa Rica, and the lengthy time to obtain coverage policies. Past legislative attempts to open the insurance market to private competition have not been successful, but there appears to be some momentum now that could lead to reform of this sector.

NAFTA/CBI Enhancement

The apparel assembly sector is an important component of the Costa Rican economy and represents a significant share of bilateral trade with the United States. The sector has remained fairly stable over the last few years. New apparel investment arguably has been diverted to Mexico to take advantage of tariff preferences into the United States under NAFTA. Other Central American countries have attracted new investment primarily because of lower wage rates. However, Costa Rica has still been able to keep most of its existing apparel industry because of the high productivity of labor and efficiency of plant operations. U.S. CBI Enhancement legislation that would provide NAFTA-equivalent treatment for the apparel sector would be important to all the CBI apparel exporting countries. In the case of Costa Rica, such measures might not lead to significant expansion of the apparel sector, but would help ensure the long-term viability of this industry. U.S. investors are strongly supportive of CBI enhancement measures. The cost savings on U.S. duties, combined with the strong productivity of the country, would likely keep Costa Rica competitive in the very cost sensitive international apparel business.

 

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V. RECOMMENDATIONS

The following recommendations are based on the suggestions of the U.S. companies interviewed with investments in Costa Rica. Recommendations encompass areas where these companies believe that the Government of Costa Rica could improve the investment climate by adopting new policies, adjusting business development priorities, or implementing proposed reforms.

Infrastructure

Legal Environment

Government Operations

Labor

Economic Climate

Other

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VI. CONCLUSION

Costa Rica offers an attractive investment climate for U.S. companies. The U.S. investors interviewed for this study, in general, have been very satisfied with their overall experience doing business in this country. Companies are foremost attracted to the political and economic stability that Costa Rica is known for, perhaps unique in Latin America. In addition, the highly educated and technically-skilled labor force is increasingly gaining the attention of high-tech investors, particularly for electronic components, software development, and for making products with more advanced manufacturing techniques (e.g. plastics, medical supplies, pharmaceuticals). To a considerable extent, Costa Rica no longer looks to regional countries as major competitors for new investment, but views itself up against countries such as Ireland, New Zealand, Singapore, Malaysia, and the Philippines, to name some examples. Costa Rica has the human resource talent, at very competitive wage rates, to appeal to high tech investors. Also, for the U.S. company, the geographic proximity of Costa Rica is an important advantage over Asian investment sites, as are, in certain respects, the cultural similarities between the U.S. and Costa Rica. The views and recommendations offered in this report, based on a sampling of U.S. firms, suggest areas that could be addressed to further strengthen the country’s investment climate and international competitiveness, most notably physical infrastructure improvements and public sector reform. The Rodriguez Administration recognizes these challenges and appears to have the confidence of the U.S. investment community for moving in the right direction.

 

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Appendix A

U.S. Companies Interviewed for Costa Rica Investor Attitude Study

1. Stewart Title
2. Citibank
3. Lucent Technologies
4. 3M
5. Aeropost International Services
6. KPMG Peat Marwick
7. Intel
8. Pozuelo
9. Conair
10. Standard Fruit Company (Dole)
11. Baxter Healthcare
12. Bali (Sara Lee)
13. Crowley American Transport
14. Ascende Information Services
15. CMC (Comercializadora de Madera Costarricense)
16. Skytel
17. Panduit

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Appendix B

Open-ended Questions for Local Manager of U.S. Company in Costa Rica

Economic Climate

1. How has the overall economic climate impacted your operations?
2. How have macroeconomic factors such as interest rate, inflation rate, and exchange rate affected your business?
3. Does the domestic economic climate allow your company to maintain a predictable business plan for operations?
4. Has your operation proved profitable over the last year? over the last five year period? What is the outlook for future profits?
5. How are profits utilized by your company (additional local investment, remittance to headquarters)? How are profits transferred back to the U.S.?
6. What is your company’s experience accessing foreign exchange for purchasing imports? For capital and profit remittances?

Legal Environment

7. Do the commercial laws in place adequately address issues of interest/concern to your company? Are these laws adequately enforced?
8. Is the judicial system adequate/effective in addressing commercial disputes?
9. Does your company perceive intellectual property rights protection in Costa Rica as adequate? How important is this to your company?
10. Does your company hold direct title to land and property? If so, was this difficult to obtain? If not, was this your company's decision?

Government Operations

11. What has been your company's experience in registering the local affiliate, applying for incentives, and receiving approvals for imports and exports?
12. How important are the trade/investment incentives your company receives? Would your company continue operations in Costa Rica without these incentives?
13. Has the Government of Costa Rica fulfilled its obligations to your company in terms of trade/investment incentives offered?
14. Have the guarantees ensured by foreign investment laws been implemented as expected?
15. Are you able to receive imports and ship exports through the customs system in a timely enough fashion to meet orders?
16. Rate the efficiency/effectiveness of the tax collection system.

Labor

17. How do domestic labor laws affect your company's operations?
18. What has been your company's experience with unions? How does this compare to other countries?
19. Cost: Was the local wage rate a consideration in your company's decision to invest in Costa Rica?
20. Productivity: Has labor productivity affected the competitiveness of your operation? Was the actual training period required to prepare your employees for full scale production consistent with your plans?
21. Availability: From your experience in hiring, what is the availability of an eligible workforce? What is your employee retention rate?

Infrastructure

22. Transportation:
a.) Did transportation infrastructure play a role in your company's decision to invest here?
b.) How does your company transport product to market?
c.) How does Costa Rica’s transportation infrastructure compare with other countries in terms of cost?
d.) Does the domestic road network satisfy your company's distribution/export needs?

23. Ports:
a.) Which port facility does your company use?
b.) How do port and ocean shipping costs compare to other countries?
c.) Are shipping schedules predictable and volume capacity adequate?
d.) Describe your company’s experience with port storage facilities and general port operations. Are port facilities adequate and efficient?

24. Airports:
a.) Does your company use cargo or passenger freight?
b.) How do air freight costs compare to other countries?
c.) Are air freight schedules predictable and volume capacity adequate?
d.) Describe your company’s experience with airport storage facilities and general airport operations. Are airport facilities adequate and efficient?

25. Energy:
a.) To what extent did the cost and availability of energy play a role in your company's decision to invest in Costa Rica?
b.) What percentage of your overhead costs go toward energy expenditures? How does this compare to other countries considered for investment? To the United States?
c.) Overall, does the energy situation in Costa Rica meet your company's needs?
d.) Do you believe greater private power production or privatization of ICE would improve the investment climate?

26. Telecom:
a.) Did telecommunications infrastructure play a role in your company's decision to invest/expand your operations in Costa Rica?
b.) How does the cost of telecommunications services compare with that of other countries where you currently operate?
c.) Overall, does the telecommunications system in Costa Rica meet your needs?

27. Would the potential for expanding your company's operations in Costa Rica be affected by the current cost or availability of energy? telecommunications? transportation infrastructure?

Free Trade Zones

28. If located in a free trade zone, has this set-up met your company's expectations/needs? How did your company originally choose this specific zone?

Finance

29. How was this investment financed (locally or with resources from abroad)? Why was that source chosen?
30. How do banking and insurance services rank in terms of cost, quality, and availability?

NAFTA/FTAA

31. Has NAFTA affected your competitive position vis-a-vis the U.S. market?
32. How important is NAFTA/CBI parity for Costa Rica in influencing your company’s decision to remain in or expand operations in Costa Rica?
33. How does your company view the opportunities/challenges presented by the Free Trade Agreement of the Americas (FTAA) targeted by the year 2005?

Overview

34. From your company's perspective, what is the most attractive attribute(s) Costa Rica offers as an investment site?
35. From your company's experience, what do you perceive as the main obstacles to investment in Costa Rica? If you could change one thing about the business climate in Costa Rica, what would that be?
36. What could the Costa Rican government do to further improve the local investment climate?
37. Describe any additional areas that have impacted your operations in Costa Rica (both positively and negatively).
38. Given your company's experience in Costa Rica, would your company make the same investment there today?

Copyright 1998

Note: The above information is not to be used for any other purpose other than private study, research, criticism or review. Thank you.