Analysis

Why Costa Rica is the IT hub - Central America

September 13, 2006

John Gibson, Judge Andrew Napolitano
Business News Americas

(BNamericas.com) - With a population of approximately 4.5 million and the highest GDP per capita in Central America (around US$10,000), Costa Rica has emerged not only as the fastest growing country in the region but also as the favorite location for many companies, particularly IT firms, to install their Central American headquarters.

A wealth of trained IT professionals, government policies favorable to investment plus relative economic, social and political stability are among the main reasons Costa Rica has become an IT investment hub.

Companies such as Coca-Cola, Procter&Gamble and Dole have their services facilities in Costa Rica. In the IT area, multinationals such as networking solutions provider Cisco Systems (Nasdaq: CSCO), IBM Consulting from IBM (NYSE: IBM), business software developer Oracle (Nasdaq: ORCL), hardware manufacturer Hewlett-Packard (NYSE: HPQ) and chip manufacturer Intel (Nasdaq: INTC) all have large operations in the country.

According to Arturo Condo analyst at global economics research firm Incae, Costa Rica should no longer be considered a "developing country" since its economy does not have the same characteristics as developing nations.

"[Costa Rica] is no longer an economy only based on natural resources or agriculture. Exports are also different from developing countries since the most important exports are microprocessors, integrated circuits, textile and medical devices. Even traditional exports are including more added value," Condo told BNamericas.

A CENTRAL AMERICAN IT HUB

According to Alexander Mora, president of the national IT and communications chamber, several factors have helped Costa Rica become the preferential location for many IT companies. "There is the human capital needed and there is also the social, economical and political stability that have generated a more stable and attractive [investment] environment." Within this context, HP expanded its local operations with the launch of a new global service center in August offering business outsourcing process services, particularly in the area of payments, finances, accountability and other IT services. This is the second facility of its kind in Costa Rica and the company plans to build up staff to over 5,000 by end-2008.

HP Costa Rica country manager Cesar Trujillo agrees that social, political and economical stability have been key to Costa Rica achieving its current role in the IT market. He also sees talent in the country, with very well trained people and bilingual capabilities, as an important element.

"Costa Rica is gaining a preponderant role in IT and services globally. Several companies are seeing the same qualities and when so many investments are concentrated, Costa Rica emerges as the IT hub it is today," Trujillo told BNamericas.

The availability of human resources highly qualified in IT has also been one of the reasons IT firms are selecting Costa Rica as their headquarters for Central America. According to Mora nearly 60% of all local universities offer degrees related to IT.

"Besides, [the government] also included English as a mandatory language [at schools] and that is generating a high number of students with a reasonable knowledge of the English language which is a basic need in this service industry," Mora said.

The IDC study showed the number of people employed in IT companies increased 5.2% between 2000 and 2005 to reach a staff of 13,798 people. The growth expected for 2005-2009 is around 2.8%.

Hewlett-Packard has over 8,000 employees in Latin America, of which approximately 3,000 are located in Costa Rica. "Costa Rica is for us an important pillar in our growth strategy. From here, we are very well positioned to be the number one player in Latin America," HP's managing director for Latin America and the Caribbean Rui da Costa told BNamericas.

And the sector keeps growing with the announcement of 12 US companies opening offices in CCosta Rica with total investments of US$10mn and offering 600 jobs. Seven of the companies are related to the electronic sector while the remaining five offer IT services and software.

THE IT SECTOR

According to a recent study from international tech consultancy IDC,the Costa Rican domestic market is expected to record moderate growth of 4% between 2005-2009 to reach US$261mn. From 2000-2005 the local market grew 9%.

The local IT industry has concentrated on exports that represent nearly one third of the country's total exports and approximately 12.3% of the nation's GDP, according to Camtic.

ICT exports are expected to increase 20% in 2006 compared to 2005, to reach US$2.8bn-2.9bn. Camtic's goal is to double exports to reach US$5bn by 2010.

"Most sales go to the US then Central America, Mexico and Canada. South America, the Caribbean and Europe come after. Electronic products represent over 60% of exports," Mora said.

The electronic components industry is the largest industry with export revenues of US$1.8bn, of which Intel's local manufacturing plant represents US$1.45bn. Intel has recently expanded its operations nationwide and also manufactures software.

THE CHALLENGES

"Costa Rica is well thought of compared to other Latin American markets. In Central America it looks great but the problem is that it is no longer competing with other Latin American markets. When analyzing those standards, we see that Costa Rica's challenge is to compete with other developed countries," Condo said.

With the support of the government the sector is aiming to increase the number of human resources available for the IT industry, along with a series of public policies, which include favorable regulations for investments in the sector.

"We are generating a closer relationship with the region since we need to take advantage of the leading position Costa Rica has in Central America and the Caribbean," according to Mora.

The executive also said Camtic has promoted closer contact between Costa Rican and Central American IT firms as a way to take advantage of the country's position in the IT industry and lower costs than other Central American countries. "That is our contribution to the sector from the association to continue the growth. To generate closer regional integration," Mora added. - (BNamericas.com)

Copyright 2006 Financial Times Ltd.

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