Covid-19 has propelled the global economy into its worst recession since the Second World War. As companies face up to the realities of shrinking margins and falling profits, strategies and priorities around foreign direct investment (FDI) are undergoing equally dramatic change, with the UN predicting a 40% drop in FDI levels this year. The question being asked by many is stark: where does FDI go from here?
In the wake of a virtual freeze on global travel, secure and reliable supply chains are now of the upmost importance, with companies shortening distances wherever possible and a renewed interest in the possibilities of nearshoring, or even onshoring. At the same time, environmental, social and corporate governance is driving decision-making like never before, as investment decisions come under growing public scrutiny and companies look to become more efficient at every level of their business.
This is also the challenge for many countries and some reacted faster than others to keep business continuity after the Covid-19 outbreak. In Costa Rica, for example, large corporates found they were able to completely virtualise operations within five days.
“Ninety-eight per cent of multinationals in the services sector in Costa Rica within the free trade zone have been working from home and fully operational during the pandemic, thanks to thorough coordination with government and a robust connectivity infrastructure,” reveals managing director of the Costa Rican Promotion Agency (CINDE) Jorge Sequeira. “Also, the medtech and advanced manufacturing sectors have kept full business continuity.”
The right environment
The last few months have renewed multinational efforts to mitigate risk, increase flexibility, drive efficiencies, accommodate new working practices, and become better global citizens, all without creating more disruption to operations than that already wrought by a global pandemic. It is the acceleration of trends that were gathering momentum pre-pandemic.
“Covid-19 has accelerated and exposed changes that were already under way,” agrees Anne Chappaz, the chief of the institutional strengthening section of the International Trade Centre, part of the WTO. “For many of these megatrends, Costa Rica is positioned advantageously.
“The multilingual and educated people, government support and geographic location provide Costa Rica with undoubted assets. CINDE has been developing and implementing action plans in response to the pandemic from the very beginning of the crisis. In an uncertain and changing world, multinationals would do well to invest in a country that can be resilient to shocks and react to their changing needs.”
Costa Rica is well established as a hub for smarter, sustainable business investment. In the last 38 years, the country has drawn in 325 multinationals from a variety of sectors, providing solutions to achieve sustainable growth while creating “value with purpose”.
This cluster has preferential access to 2.8 billion people and 75% of world GDP, thanks to 15 trade agreements. Costa Rica exports more than 4,400 different products to 155 countries and its free trade zone regime has transformed the country’s export structure.
Non-tourism services exports have grown more than six-fold since 2000. Costa Rican IT and IT-enabled services exports reached more than $4.7bn in 2019 (6% growth) and the US market accounted for 65% of total Costa Rican knowledge-intensive services exports. Costa Rica leads this kind of export of services in Latin America as a percentage of GDP (7%).
Costa Rica is a net exporter of services. Its trade balance surplus reached nearly 10% of GDP in 2019 (the rest of Latin America posted an average deficit of 1%). The country’s human capital, which is trained and upskilled by foreign companies, is a major differentiator.
“Costa Rica is truly at the intersection of sustainability, business and technology,” believes managing director of Accenture Costa Rica Fabricio Soto.
With sustainability a key consideration steering FDI decision-making, environmental stewardship is no mere marketing tool; it is in the country’s DNA. An astonishingly beautiful nation with around 6% of the planet’s biodiversity, in September 2019, Costa Rica received a Champions of the Earth award, the UN’s highest environmental honour, for protection of nature and its ambitious policies to combat climate change. Around 99% of the country’s electricity came from renewable energy sources in 2019.
In a country that puts so much stock in health and well-being, it is unsurprising to see Costa Rica become a natural hub for life-centred solutions. Under its ‘people, planet, and prosperity’ pillars, Costa Rica has constructed an ecosystem of innovation, resilience, customer eccentricity, and technology design, enabling multinational partners to lay down long-term, domestic roots at the same time as they export their goods and services overseas.
Shortening the chain
“Our clients have direct access to top talent with competitive skills, deep industry knowledge, wide industrialised capabilities, certifications, and more,” explains Soto, Accenture’s leader in Costa Rica. “The geographical proximity with the most important economies of the continent, and competitive rates, are some of the benefits that Costa Rica offers to worldwide organisations looking to work with a proven innovation and technology services provider in a flexible time zone.”
During a July webinar organised by CINDE, Anabel González, senior director of the World Bank Group Global Practice on Trade and Competitiveness, echoed Soto’s thoughts, pointing to the country’s highly trained workforce, strategic location, excellent business climate, preferential access to primary markets, and quality of infrastructure as key drivers for attracting multinationals to Costa Rica.
González also expanded on how macro political and economic shifts predating coronavirus were forcing reappraisals of strategy for a number of international businesses.
“The increase in China’s costs, conflicts in international trade, the strengthening of new technologies, and the trade war between China and the US were already driving change in the global supply chain,” she said.
In recent months, supply chains have certainly revealed their fragility and exposed a starkly unfair distribution of risk. As a result, we are seeing increased diversification of sources of supply and of markets; the shortening or nearshoring of supply chains; and more empathy in how lead buyers respond to the challenges facing their suppliers.
Costa Rica is keen to build on its previous success in addressing these issues and investors appear to share the sentiment – between March 2019 and May of this year, services exports in ICT grew nearly 7% and corporate services rose by 9.4%, which includes the first three months of the Covid-19 outbreak in Costa Rica.
Variety and value
In 1997, Intel landed in Costa Rica and has developed increasingly value-added processes in the years since. The establishment of a “mega laboratory” in 2014 for testing the company’s new products in Costa Rica marked the first time Intel has consolidated its laboratories into a single location.
“Intel decided to invest in Costa Rica for various reasons, including the availability of a qualified labour force, its geographical location and the business-friendly conditions within the country,” says manager in global public affairs and sustainability at Intel Costa Rica Timothy Scott Hall. “Over the past 23 years, Intel Costa Rica site has transformed itself a number of times, and we expect to continue to evolve to compete in what is a very challenging global high-tech environment.”
In 2019, the country was home to 69 companies in the life sciences sector, employing almost 30,000 people. There were 44 firms in the advanced manufacturing sector with around 9,600 employees. Light manufacturing and the food industry had 34 companies with 6,200 staff. A total of 179 firms operated in the services sector, employing more than 72,000 people.
Medical devices made up around 40% of exports in 2019, the country’s number one industrial export. Meanwhile, IT and IT-enabled services accounted for a further 38%. Traditional goods – including coffee, bananas, beef, and sugar – now only make up around 10% of exports.
In recent decades, Costa Rica has achieved a well-deserved reputation worldwide for its environmental protection and sustainability agenda. It is one of Latin America’s most politically stable, most technologically advanced, and best educated countries, according to the World Economic Forum. Costa Rica ranks number one in human capital in Latin America.
More to the point, it recognised where global FDI trends were headed far earlier than most. As companies and economies elsewhere scramble to adapt to the ‘new normal’, Costa Rica finds itself uniquely well-positioned to create value with purpose in a post-Covid economy.