Analyzing the Strengths and Weaknesses of the Costa Rican Economy Research Paper

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Costa Rican Economy from the FDI Perspective

Development of a nation results from a number of national characteristics and policies, pertaining to extra-economic and economic matters. No Latin American nation is developed -- in fact, all are far from it, which is a harsh reminder of the fact that their task is challenging and mostly pending. However, the Latin American region is quite heterogeneous, with respect to both income (a 15:1 difference exists between the nation that is richest and that which is poorest) as well as relative achievements and strengths. Numerous Latin American nations exhibit, together with failures in salient policy, a few successes that are worth studying and, perhaps, emulating. In the past three decades, the Costa Rican nation has, fairly consistently, implemented major foreign investment and trade reform, among others. This has generated some valuable outcomes with respect to export composition and volume, economic sectorial composition, and the nature and volume of FDI (foreign direct investment) attracted by the country. On the whole, the country has progressed to some extent over time. For instance, it is the second most prosperous Latin American nation with respect to cumulative growth of output (Purchasing Power Parity) in 30 years since 1980; it also ranks first in proportional extreme poverty rate reduction. The country's progress may be attributed chiefly to its performance in investment and trade (Trejos 1). This paper aims at discussing an example of economic progress -- internationalization via FDI -- following economic reform, which started in the middle of the '80s.

Strengths

Costa Rica's strategy with regard to FDI has enjoyed great success. FDI flows resulted in significant changes in trade specialization of the country. The nation transformed from a system of export that was concentrated heavily on garments, textiles, and agricultural products into one that is more diversified, with new, and more technology- and knowledge- intensive offerings (OECD 48). Intel's arrival was clearly a "pull" for other overseas firms in related industries. After the year 1997, the country registered a rise in number of knowledge-intensive firms, including advanced manufacturing, medical devices, and business services (OECD 42; Larrain, Luis and Andres 5). For long, the nation has remained a peculiar case. Several other Latin American nations are continuing to primarily export primary commodities and natural resources, but the small Costa Rican republic has created an advanced industrial sector, whilst simultaneously progressing up the supply chain at the global level (Kahlke 32)

A great share of Costa Rica's progress comes from FDI. It has promoted export upgrading and diversification, generation of better and more jobs, and business capability accumulation. FDI has resulted in immense transformations in the trade specialization of Costa Rica. At first, the nation's economy was quite small and specialized in limited primary commodity export (i.e., sugar, coffee, and bananas export), but the country perceived FDI attraction to be a strategic opportunity for sustaining growth, creating better jobs, and enhancing exports. ICT giant, Intel's arrival in the country in the latter part of the 90s facilitated the country's creation of a status as a lucrative place for investing. Ever since, a lot has occurred in the country with it having developed a sound track record for FDI attraction. FDI has helped increase knowledge-intensive produce export in the past 30 years. Jobs created as a result of FDI increased in number from 7758 (2003-2005) to 34385 (2009-2011). Furthermore, the nation has achieved sophistication in its export system and currently ranks close to Norway and Croatia, though still remains behind Malaysia (OECD 17).

Additionally, FDI has served as the demand-push in improving training and education, as well as fostering learning (at worker, production, and management levels), thereby creating a favorable national business environment. While the nation's most important foreign investor is the U.S., FDI source markets have grown in number from eight (2005) to eighteen (2009), including newly emerging markets like China. Of late, foreign firms within the country are seen to be upgrading business towards software design, research and development, and similar increasingly knowledge-intensive commercial activities. The Costa Rican government is implementing a more careful FDI attraction approach and concentrating its attention on knowledge-intensive firms. The aforementioned trends have promoted the creation of budding industrial clusters within the areas of medical devices, advanced manufacturing, and business services (OECD 18).

Gradually, the nation has been moving towards an FDI policy approach that is more selective in nature, through its targeting of particular knowledge-intensive areas, like knowledge processing, advanced manufacturing, life sciences and medical devices, as well as (lately) clean technologies.

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Prioritization of knowledge-intensive foreign firms in the nation implies concentrating on drawing in new firms that operate in these areas, as well as simultaneously creating conditions for supporting upgrading of firms that are already operating in the nation. This decision of prioritization of knowledge-intensive foreign corporations isn't unique to the Costa Rican government; many nations all across the world are seen following this new trend. Numerous nations are attempting to draw in more hi-tech FDI, which successively results in sector prioritization (including telecommunication and electronics, aerospace, business and telecommunication, pharmaceuticals, and automobile) characterized by greater unbundling of production. Some economies, such as those of Malaysia and Ireland, have enjoyed particular success in this arena. Clearly identifying sectoral targets enabled these nations to concentrate their efforts and specify conditions necessary for fostering innovation (such as a first-rate, innovative research environment and availability of skilled and technical workforce) (OECD 19-20).

Weaknesses

The nation of Costa Rica is faced with a growing mismatch between production structure requirements and skilled-labor supply. While the nation generates fairly high-quality graduates, considerable misalignment exists between graduate supply by specialization area and skills needed by the industry. Doctoral graduates of the nation clearly prefer social sciences. All but one PhD granted by the nation in the years 2000-2002 were social science degrees. This trend has started to reverse, of late: by the years 2007-2009, the country awarded over twice its earlier number of doctoral degrees, with more in technology-related fields (more than 18% in the medical sciences area, 3% in the agricultural sciences area and below 2% in the field of natural sciences). Nevertheless, it has not granted any PhDs as yet in computer sciences and engineering. As in a majority of nations, alignment of skills supply with industrial requirements is not an easy task. The country's government offered some responses to this challenge in the year 2011, by creating an MICIT (Ministry of Science and Technology) - and COMEX (Ministry of Foreign Trade) - led Working Group, in charge of identifying and carrying out actions for bridging gaps between supply and demand of skills (OECD 18).

Moreover, Costa Rica has an inadequately developed innovation system. Commitment to innovation and R&D investments, and links between domestic and overseas firms continue to be poor. The nation hardly invests in R&D (just about 0.4% of its gross domestic product in 2010, against the Organization for Economic Co-operation and Development (OECD) average - 2.3%). Private-sector's R&D commitment is especially weak; it only accounted for a 33% share of overall R&D expenditure of the nation in 2010 -- which starkly contrasts that of other emerging markets (Malaysia 84%, Singapore 60%, and China 70%). The links between domestic and overseas firms within Costa Rica continue to be weak. With only some exceptions, local firms have not enjoyed much success in providing international firms with critical inputs of production. Foreign firms have not found much incentive for developing a local supplier network, because of their internationally-oriented supply chain strategy, absence of international standards and certifications, poorly developed local production system, and concerns with regard to scope economies, quality control and trust. With foreign firms shifting increasingly towards knowledge-intensive sectors, the demand for native supplier and client networks will typically increase, combined with quality requisites for domestic service and industrial capabilities (OECD 19; Sohn 81).

The country has what it takes to succeed in high technical content/knowledge and low --volume products and services (e.g., medical and precision equipment, as well as software development and design). Having established a firm reputation as one of the lucrative countries for investment, Costa Rica has been making headway as an appropriate location for advanced manufacturing and software design, on account of growth of a "critical mass" of knowledge-intensive biomedical devices/life sciences firms. However, the possibility of better and greater FDI will hinge on Costa Rica's ability of designing a sound attraction strategy. Attraction of knowledge-intensive foreign firms can aid "activation" of governmental policies beyond promotion of investment (e.g. education, innovation, production development, competitiveness, and linkages), thereby contributing to the nation's overall growth. The current national government clearly understands these challenges, and is engaged strongly in the attraction of knowledge-intensive foreign direct investment (OECD 20).

Conclusion

The small Costa Rican has attained considerable economic transformation in the past few decades. It has succeeded in altering its composition of exports from primary commodities to sophisticated services and products, owing to its targeted endeavors towards attracting FDI. Parallel to the above, the country.....

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