Business Risks, Opportunities in Costa Rica: Don't Let Enchantment Cancel Common Sense

By William J Phelps

The Tico Times

March 17, 1995

For a variety of reasons, many of them unique to Costa Rica, the number of foreigners seeking to do business here is growing rapidly. Some foreigners start their own ventures, others invest in the ventures of others. Property purchases are particularly common, both for investment and for purposes of "living happily ever after."

Many foreigners have positive business experiences in Costa Rica. Others fail. The odds for success are no different here than in any other country. The reasons for success or failure are also the same as anywhere else.

What does seem to be unique, is the wide range of perceptions that foreigners bring to Costa Rica regarding business risks and opportunities. The lobby bar of any hotel in town is often alive with conversations regarding either the many excellent opportunities to make a fortune, or the difficulties foreigners encounter while trying to conduct business.

The Tico Times responsibly prints news stories about business scams, financial institution failures and other business horror stories. Its classified ads are crowded with opportunities to invest. While many foreigners research relevant legal issues, and perform appropriate feasibility assessment prior to entering into business transactions, others carelessly expose their investments to unrealistic ventures, dishonest promoters and other dangers.

If there is a formula for business success in Costa Rica, it involves (1) the ability to recognize real opportunity, and (2) the capacity to effectively identify and employ the resources necessary to develop and implement a good business plan.

Banking and financial services rank among the resources most necessary for any business activity. Yet, most foreigners approach the task of security financial services with either blissful ignorance or paralytic trepidation.

Banks and financial services in Costa Rica suffer from a particularly bad reputation. Concerns about security and complaints of inadequate services are commonplace.

Costa Rican financial institutions are generally perceived to be unstable. Several years of severe financial crisis during the 1980s and subsequent public and private sector default with international financial obligations, left the country with a poor international credit rating. The failures of several financial institutions during the last decade, followed by the recent collapse of Banco Anglo Costarricense, one of the country's largest state owned banks, have contributed to a perception of instability.

Admittedly, financial institution security warrants concern; and any investor would be foolish to transfer assets without prior analysis.

In spite of the horror stories, however, several Costa Rican financial institutions offer security that meets or exceeds international standards. Many have well established correspondent relationships with major foreign banks. The risk of loss with these institutions is probably no greater than with most North American or European banks.

Banking services are relatively underdeveloped in Costa Rica. Long dominated by a state-owned bank monopoly, the country's banking system has been slow to develop. The modern, customer-oriented banking services to which most foreigners are accustomed have only recently appeared in Costa Rica.

However, adequate services are becoming increasingly available. Changes in the country's banking laws during the last several years have enabled private banking, including some foreign bank interests, to gain a foothold, which has resulted in increased competition and improved services.

A reasonable amount of investigation is necessary to secure the services of a safe and responsive financial institution. Anyone seeking to do business in Costa Rica must evaluate alternatives and select the bank or "financiera" with which he or she is most comfortable. Necessary homework can be as simple as assessing your requirements, visiting several institutions and consulting with experienced individuals or organizations. Professional consultants are also available to assist you.

Real estate purchases are among the most common types of business transactions with which foreigners become involved. The Costa Rican property marketplace has long been booming; and many foreigners have successfully conducted real estate transactions.

There have been all too many cases, however, in which unwary buyers have paid above market prices and/or have assumed "ownership" of encumbered or restricted properties. In appearance, the Costa Rican real estate market is similar to those in North America and Europe. However, there are significant differences of which the buyer should be aware.

Although most real estate brokers are honest and capable, the legal structures and other controls to which most foreigners are accustomed are considerably looser in Costa Rica; and it is relatively simple to become victimized by unscrupulous or incompetent sellers.

A buyer must perform basic due diligence, making certain that he or she is dealing with a reputable seller or seller's agent. Careful check of the official property registry is necessary, and comparative market analysis is recommended along with specific technical physical inspections. Although it is possible for a buyer to personally do some of the necessary homework, proper professional support is highly recommended.

Proper analysis of feasibility is the most important and most frequently neglected aspect of new business ventures. Too many investors, apparently enchanted by Costa Rica's magic, fail to take standard precautions prior to embarking on business ventures. The same care that would be taken with a business transaction in Toronto or Topeka, is frequently cast into the fragrant winds of Costa Rica. Anxious to become established in this country's pleasant atmosphere, many experienced and inexperienced business people fall victim to the fantasies of untested business ideas. Many others fall victim to clever scam artists, most of whom are foreigners themselves, friendly, conveniently bilingual and very familiar with the vulnerability of newcomers.

Any business opportunity should be thoroughly assessed prior to making any commitment. Check the legal and personal backgrounds of the entities and individuals involved.

Every successful investment begins with an investment in due diligence. Costa Rica is a place of excellent opportunity as well as a place of risk.

(William J. Phelps, a financial consultant and former banker, can be reached at (506) 233-6435/Fax: (506) 255-4611.)

Copyright 1995

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