Doing Business in Costa Rica:

An Expert's View about Business Environment in Costa Rica

Posted on: 22 Feb 2012

Chapter 1: Doing Business In Costa Rica
• Market Overview
• Market Challenges
• Market Opportunities
• Market Entry Strategy

Market Overview
• The United States is Costa Rica’s main trading partner, accounting for about 40% of
Costa Rica’s total imports. According to U.S. Census Bureau trade data, the U.S.
had a US$3.5 billion trade deficit with Costa Rica in 2010, as compared with a deficit
of US$897 million in 2009, surpluses of US$1.742 billion in 2008, US$637 million in
2007, US$288 million in 2006, US$183 million in 2005, and a deficit of US$27 million
in 2004.
• New foreign direct investment in Costa Rica from all countries was US$1.45 billion in
2010, US$ 1.35 billion in 2009, US$2.07 billion in 2008, US$1.9 billion in 2007,
US$1.5 billion in 2006, and US$861 million in 2005. Just over half of that investment
has come from the United States. Del Monte, Dole, and Chiquita have a large
presence in the banana and pineapple industries. In recent years, Costa Rica has
successfully attracted important investments by such companies as Intel
Corporation, which employs 3,200 people at its major fabrication plant; Procter &
Gamble, which employs about 1,200 in its administrative center for the Western
Hemisphere; Hewlett-Packard (6,500), and Boston Scientific, Allergan, Hospira,
Baxter Healthcare and others from the healthcare products industry. According to the
US Census Bureau, 2010 data show that two-way trade between the U.S. and Costa
Rica exceeded $13.8 billion during that timeframe.
• After experiencing positive growth over the previous several years, the Costa Rican
economy shrank slightly in 2009 (-2.5%) due to the global economic crisis. The
services sector--around 68% of GDP--was the most affected, with tourism falling by
8%. The economy experienced a rebound in 2010 with a 3.6% GDP growth rate.
Costa Rica enjoys the region’s highest standard of living, with a per capita income of
about US$10,569, and an unemployment rate of 6.7%. Consumer price inflation is
high but relatively constant at about a 10% annual rate over the last decade.
• According to the latest National Population Census of 2010, the percentage of
population living in poverty in 2010 was estimated at 18.3 percent in the urban areas
and 26.3 percent in the rural areas, with 4.2 percent in extreme poverty in the urban
areas and 9.0 percent in extreme poverty in the rural areas. Inflation reached 13.9%
at the end of 2008, dropped during 2009 to 4.0% by year’s end, and reached 5.8
percent by the end of 2010. Inflation rate was 5.8 percent during 2010. During 2010
the unemployment rate reached 7.3 percent, an increase from the 2009 year-end
figure of 7.0 percent. The Government of Costa Rica has been running budget
deficits in 2009 and 2010 but is currently capable of borrowing the necessary funds
to do so.

Market Challenges
• While Costa Rica’s close trading and investment relationship with the United States
has long benefited both nations, the recession that affected the U.S. in 2008-2009,
began to be felt in Costa Rica after some lag time and has diminished the level of
bilateral trade and investment activity to an extent. A bright spot is that there was an
upturn in Costa Rica’s economic activity at the end of 2009, which continued in 2010.
During 2010, foreign investment activity in Costa Rica increased by 12 percent.
Growth is expected to continue during 2011.
• U.S. tourism to Costa Rica, which drives both local employment and U.S. exports
(building and supplying the tourist resorts), has fallen off substantially since 2008,
affecting the construction industry whose activity dropped off significantly in the
coastal areas. By the end of 2010, both the construction industry and the tourist
visits began to show a slow recovery. An important fact in all this is the Central
America-Dominican Republic-United States Free Trade Agreement (CAFTA-DR)
which entered into force on January 1, 2009, and has brought new interest and
opportunity in trade and helped to buoy the local economy and demand for U.S.
exports to some degree.
• As of June 2010, Costa Rica ranked 125 out of 183 countries in the 2010 World
Bank's Ease of Doing Business Index. This has hampered the flow of investment and
resources badly needed to repair and rebuild the country's public infrastructure, an
infrastructure which has deteriorated over the years from a lack of maintenance and
new investment. Most parts of the country are accessible through an extensive road
system of more than 30,000 kilometers (18,750 miles), although much of the system
has fallen into disrepair. Contamination in rivers, beaches, and aquifers is a matter of
rising concern, given that the great majority of wastewater is discharged directly into
river systems, untreated. Although Costa Rica has made significant progress in the
past decade in expanding access to water supplies and sanitation, just 3.5% of the
country's sewage is managed in sewage treatment facilities, with the country’s Water
and Sewage Institute (AyA) estimating that perhaps only 50% of septic systems
function.
• Although the overall investment picture, to date, has been relatively bright, the Costa
Rican government really had not until recently enjoyed great success with many of
its concession schemes for its public works projects, including the Juan Santamaria
Airport in San Jose, which in July 2009 transferred its management to a new entity.
Infrastructure, in an overall sense (e.g., roads and bridges, water/wastewater,
electricity generation, airports and ports) is in substantial need of improvement. This
represents both challenges and opportunities. In many instances, deteriorated
infrastructure will need to be improved if Costa Rica is to remain competitive in the
regional and world economy.
• Enforcement of intellectual property laws has been lacking in many cases, due to
insufficient resources and training, and weaknesses in the country’s criminal code.
This is expected to improve as CAFTA-based commitments begin to take hold. The
legal process in general is often sluggish, making binding arbitration an attractive
option.
• Costa Rica recognized the People’s Republic of China in 2007 and was visited by
the President of China with great fanfare in 2008. Costa Rica subsequently signed
(February 2010) a free trade agreement with China. The intensified relationship
between these two countries implies growing competition for U.S. exports from
products originating in China. Costa Rica is also part of the Central American effort
to negotiate a Free Trade Agreement with the European Union.

Market Opportunities
• The National Export Initiative (NEI) introduced by President Obama in January 2010
in his State of the Union message, provided a goal around which the US Embassy in
Costa Rica and its various sections have come together to support American
business and to achieve a doubling of US exports by 2015.
• CAFTA-DR’s entry into force on January 1, 2009, represented a major step forward
in the trade and investment relationship between Costa Rica and the United States,
opening opportunities in the wireless telecommunications, Internet, and insurance
markets that previously had not existed.
• Costa Rica’s accession to the agreement has meant that more than 80 percent of all
non-agricultural goods and more than 50 percent of agricultural products became
duty-free immediately, on January 1, 2009, and the remaining duties are being
eliminated on an agreed-upon schedule that is underway.
• Furthermore, CAFTA-DR’s entry into force eliminated Costa Rica’s dealer protection
regimes, allowed non-discriminatory treatment for U.S. firms in government
procurement bids, and provided stronger protection for investors.
• Market prospects are excellent in the following sectors: building products, hotel and
restaurant equipment, food processing and packaging equipment, and medical and
dental equipment. Prospects are also good in auto parts, drugs and
pharmaceuticals, printing and graphics equipment, security equipment, and
construction equipment, as well as in the emerging telecommunications and
insurance sectors.

Read the full market research report


Posted: 22 February 2012

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