Tuesday 31 January 2023

Services, medical industry and teleworking cushioned the fall in foreign investment

The Unctad estimated a 40% drop in world direct investment flows in 2020 as a result of the pandemic, but in Costa Rica, it fell 21% in the first nine months of 2020 compared to the same previous period.

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28 January 2023 - At The Banks - BCCR

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QCOSTARICA – In a pandemic year where global value chains were broken, key economies for Costa Rica fell and a very strong drop in global investment flows was estimated, foreign companies continued to invest in the country.

The information compiled by the Banco Central (Central Bank) through the Quarterly Balance of Payments indicates that from January to September 2020 foreign investment totaled US$1.219billion, 21% less than in the same period of the previous year (US$1.553 billion), but was not so affected as expected.

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This investment includes the arrival of new companies to the country, the expansion of operations of foreign firms operating in Costa Rica, reinvestment of profits, as well as purchases made by foreigners of corporations or properties in the country.

From the United States, where the largest amount of investment comes from, the flow of resources went from US$967 million, in the first nine months of 2019, to US$823 million in 2020.

The United Nations Conference on Trade and Development (UNCTAD) estimated that world flows of foreign direct investment would decrease to 40% in 2020, in its World Investment Report 2020.

According to this report, in the first quarter of 2020 both the announcements of investment projects in new facilities and cross-border mergers and acquisitions fell more than 50%. In terms of global project finance, a major source of investment in infrastructure projects, new operations were down by more than 40%.

Contributing factors

Two factors, mainly, helped Costa Rica avoid a greater drop in foreign investment, amid the pandemic: the predominant type of industry and teleworking, according to the assessments of Jorge Sequeira, general director of the Coalition of Initiatives for Development (CINDE), in charge of bringing companies to the country; and Ricardo Monge, consultant economist for international organizations.

Monge explained that in manufacturing in Costa Rica, medical services predominate, where with the pandemic there was rather a demand in some production lines, and business services, which could be adapted quickly.

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“The experience of Costa Rica in attracting foreign direct investment (FDI) and the behavior of multinationals shows that in the largest sectors (business services in services and medical devices in manufacturing) what it demonstrated is an extraordinary resilience thanks, in good measure, to that ability that these companies have to make their productive activities more flexible and take advantage of new opportunities that they are constantly seeing, ”said Monge.

“It is the result of a country effort to have inserted key sectors into the national economy for more than 20 years. These are sectors that boost the economy and have benefited during this pandemic, such as medical devices and digital technologies or services enabled by digital technologies,” added Sequeira.

Monge added that in consulting various medical device companies, he found that teleworking was a very important element for them to continue their production in Costa Rica.

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Just six months before the pandemic, in September 2019, Costa Rica approved the “Law to Regulate Telework in Costa Rica”, which facilitated this option.

“These companies told us that although they belong to global value chains, and it was not a lie that they were interrupted at the beginning as a result of the crisis, one thing they saw is that the people who worked with them very quickly were able to start doing it from home, which made productive activity in Costa Rica not suffer,” said Monge.

Sequeira also indicated that teleworking was key in sustaining this type of investment, which even increased employment in 2020 by about 20,000 jobs.

“Even the companies that have already been established continued to produce goods and services without impact, they adapted to the context of the pandemic and the restriction measures adopted by both Costa Rica and other countries,” said the CINDE representative.

Proof of the above, he added, is that in just three days 98% of the personnel of the companies in the service sector implemented teleworking. In the case of manufacturing companies, 87% resorted to teleworking for their non-operating personnel,” he highlighted.

To these factors, Sequeira added that CINDE’s effort to attract investment did not cease during 2020.

Learned lessons

Monge said that we should ask ourselves: what have we learned from this experience? Well, it is to be applauded that the FDI survived, but there are opportunities that are not being used as they should.

He pointed out, as an example, the potential that Costa Rica has to create a life sciences hub (activity center) taking advantage of the cluster (group of companies) of medical devices and biotechnology that the country already has.

In addition, the possibility of developing new sectors, such as pharmaceuticals, and also joining other institutions such as the Clodomiro Picado Institute.

Another example is to improve the digitization of procedures where, he considered, it is necessary to define a leading institution to direct the process.

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