2012 Investment Climate Statement
Bureau of Economic and Business Affairs
June 2012
Report

Costa Rica’s investment climate is generally favorable and has been for many years. Consequently, foreign direct investment is high and has been a significant contributor to Costa Rica’s economic growth. Nevertheless, the country's legal and cultural environment continues to present stumbling blocks to investors.

Openness to, and Restrictions Upon, Foreign Investment

Costa Rica actively courts foreign direct investment (FDI), placing a high priority on attracting and retaining high-quality foreign investment. The Foreign Trade Promotion Corporation (PROCOMER) as well as the Costa Rican Investment and Development Board (CINDE) lead Costa Rica’s investment promotion efforts. In recent years, CINDE has focused on creating clusters of related businesses, successfully targeting potential investors in the areas of “medical devices,” “services” and “advanced manufacturing.” The concentration of businesses in these sectors has led to synergies that then encourage other companies to invest in Costa Rica. FDI in Costa Rica climbed steadily from the year 2000 ($408 million) to 2008 (over $2 billion), falling back in the last two years to 2006 levels of roughly $1.4 billion. (See “Foreign Direct Investment Statistics” below.) A recent political debate on reduction of free trade zone benefits only two years after a comprehensive reform of free trade zone legislation has raised concerns in the business community about unpredictability in the investment environment. (See “Free Trade Zones” below.)

Costa Rica has continued an ambitious program of negotiating, signing and ratifying free trade agreements, all of which encourage greater openness to foreign trade and investment. Costa Rica together with El Salvador, Guatemala, Honduras, Nicaragua, and the Dominican Republic, is a signatory to the U.S. – Central America – Dominican Republic Free Trade Agreement (CAFTA-DR). CAFTA-DR, which entered into force in Costa Rica January 1, 2009, improves Costa Rica’s investment climate by strengthening the protection of intellectual property rights, providing a mechanism for arbitration, opening key sectors to competition, and assuring access to markets in other CAFTA-DR economies. Costa Rica has recently implemented free trade agreements with Panama and China, is updating agreements with Mexico and Canada, is awaiting ratification of signed agreements with the European Union and Singapore and is exploring agreements with Korea and Colombia.

Costa Rica does not have a formal mechanism for screening foreign investment. Such investment is expected to comply with local law and practice. The country’s commercial code details all business requirements necessary to operate in Costa Rica. The laws of public administration and public finance contain most requirements for contracting with the state. All businesses must be registered in the national registry, thereby becoming national companies that may have national or foreign owners. The investment requirements for foreign and national persons and companies are identical. Businesses may be established starting from nothing, acquired, merged with, or taken over in much the same way as is done in the U.S.. Foreign partnerships with local businesses are quite common. The state does exercise some monopoly control in some economic sectors as detailed below in the “Competition from State-Owned Enterprises” section.

Several public institutions are responsible for consumer protection as it relates to monopolistic and anti-competitive practices. The “Commission for the Promotion of Competition” (COPROCOM), a semi-autonomous agency housed in the Ministry of Economy, Industry and Commerce, is charged with investigating and correcting anti-competitive behavior across the economy. SUTEL, the Telecommunications Superintendency, shares that responsibility with COPROCOM in the Telecommunications sector. Both agencies are charged with defense of competition, deregulation of economic activity, and consumer protection. COPROCOM has been accused on occasion of being underfunded and weak, although it does project a regulatory presence.

The judicial system generally upholds contracts, but caution should be exercised when making investments in sectors reserved or protected by the constitution or by laws for public operation. Investments in state-protected sectors under concession mechanisms can be especially complex due to frequent challenges in the constitutional court of contracts permitting private participation in state enterprise activities. Furthermore, independent government agencies can issue permits or requirements that may contradict the decisions of other independent agencies, causing significant project delays.

The Chinchilla administration is moving ahead with efforts to build infrastructure and manage public works projects by using the 1998 concessions law, modified in June 2008. The modifications to the concessions law were designed to streamline related processes. Three concession agreements are currently functioning. Operations at the Port of Caldera, the country’s principal Pacific port, began successfully in 2006. The San Jose-to-Caldera highway concession became fully operational in 2010, although mudslides and persistent instability of the roadbed prompted critical discussion of the highway concession. The concessionaire of the Liberia Airport’s new passenger terminal is currently engaged in discussion with the government of Costa Rica regarding formal acceptance of the works and the beginning of operations.

Investors must exercise “caveat emptor,” since many firms operate in the informal sector of the economy. Appropriate due diligence should include confirming a company’s registry and formal participation in the Costa Rican economy such as paying taxes and registering all workers with the Social Security system.

While the government focuses on promoting foreign investment in export industries, foreign franchises have prospered in the domestic market over the past thirty years. Both foreigners and nationals have invested in bringing U.S. brands from a wide array of business sectors to Costa Rica, including fast food (such as Taco Bell, Kentucky Fried Chicken, Pizza Hut, Domino’s Pizza, Papa John's Pizza, McDonald's, Burger King, Wendy’s, Subway, Quiznos and TCBY Yogurt), car rentals (including Hertz, Avis, Dollar, and Budget), hotels (such as Marriott, Doubletree by Hilton, Regents, Hampton Inn, and Best Western), and designer clothing boutiques (including Tommy Hilfiger, Liz Claiborne, and athletic wear brands such as New Balance). Price Smart (owned and managed by the founders of Price Club in the U.S.) has five Costa Rican stores. WalMex, via a 2009 acquisition, controls Wal-Mart Central America, a company with Costa Rican stores operating under the Pali, Maxibodegas, Mas x Menos, and WalMart brands.

Costa Rica’s investment policy reviews by international financial institutions over the last several decades tend to be positive but qualified by a list of problems that must be addressed soon. Costa Rica’s persistent and growing government budget deficit is of particular concern. Costa Rica ranks as follows under the following criteria:

If a scroll bar appears below the following table, swipe the table to move left/right of the dashed line.

Measure

Year

Index/Ranking

TI Corruption Index

2010

5.3

Heritage Economic Freedom

2011

67.3/(Rank 49 of 179)

World Bank Doing Business

2011

Rank 121 of 183

World Economic Forum GCI

2011-2012

Rank 61 of 139

Millennium Challenge Corporation (MCC) measures are not available for Costa Rica

Conversion and Transfer Policies

There are no restrictions on receiving, holding or transferring foreign exchange. There are no delays for foreign exchange, which is readily available at market clearing rates and readily transferable through the banking system. From 1983 until 2006, Costa Rica maintained a crawling peg exchange regime with the U.S. dollar. However, in October 2006, the country transitioned to a crawling band regime, which is in reality a “dirty float” with explicit upper and lower limits. The Central Bank also created a foreign exchange market, “MONEX”, (USD/Colon) in which buyers and sellers are matched blindly. Participants may register without any initial fee and may either buy or sell amounts over the $1,000 USD minimum. A variety of instruments designed to insure against exchange rate volatility are being introduced into the market and may be obtained through the Securities Exchange (“Bolsa de Valores”) or through banks. To date, the result appears to be satisfactory for the Central Bank, but market participants have struggled to adapt to the greater uncertainty. Dollar bonds and other dollar instruments may be traded legally.

No restrictions are imposed on reinvestments or on the repatriation of earnings, royalties, or capital except when these rights are otherwise stipulated in contractual agreements with the government of Costa Rica. Rents and benefits remitted overseas, including royalties, are subject to a withholding tax in accordance with Title IV of the Income Tax Law No. 7092 at rates varying from 10 to 25 percent. Financial institutions on the Costa Rican Central Bank’s list of “first-tier banks” are generally exempt from this payment as it might apply to interest and other financial costs. The conditions described above are currently under discussion in the Legislative Assembly and may well change if a proposed new “fiscal law” is adopted in 2012.

Expropriation and Compensation

Expropriation of private land by the government without prompt or adequate compensation has hurt some Costa Rican and foreign investors. The three principal expropriating ministries in recent years have been the Ministry of Public Works - MOPT (rights-of-way), the Costa Rican Electrical Institute – ICE (rights-of-way) and the Ministry of Environment, Energy and Telecommunications - MINAET (National Parks and protected areas).

Article 45 of Costa Rica’s constitution stipulates that no property can be expropriated from a Costa Rican or foreigner without prior payment and demonstrable proof of public interest. The 1995 Law 7495 on expropriations further stipulates that expropriations can take place only after full and prior payment is made. Foreigners and Costa Ricans are supposed to receive equal treatment. Provisions include: (a) return of the property to the original owner if it is not used for the intended purpose within ten years or, if the owner was compensated, right of first refusal to repurchase the property back at its current value; (b) a requirement that the expropriating institution complete registration of the property within six months; (c) a one-month period during which the tax office must appraise the affected property; (d) a requirement that the tax office itemize crops, buildings, rental income, commercial rights, mineral exploitation rights, and other goods and rights, separately and in addition to the value of the land itself; and (e) provisions providing for both local and international arbitration in the event of a dispute. The expropriations law was amended in 1998 and then again in 2006 to clarify and expedite some procedures, including those necessary for acquiring land for the construction of new roads.

There is no discernible bias against US investments, companies or representatives during the expropriations process. Costa Rican public institutions follow the law as outlined above and generally have acted in a way acceptable to the affected landowners. However, there are currently several sets of cases in which landowners and government differ wildly in their appraisal of the expropriated lands’ value; in those cases judicial processes have taken years to resolve. In addition, landowners may be prevented from developing land which has not yet been formally expropriated for parks or protected areas; the courts will eventually order the government to proceed with the expropriations but the process can be long.

Invasion and occupation of private property by squatters, who are often organized and sometimes violent, occurs in Costa Rica. The Costa Rican police and judicial system have at times failed to deter or to peacefully resolve such invasions. It is not uncommon for squatters to return to the parcels of land from which they have been evicted, requiring expensive and potentially dangerous vigilance over the land.

Dispute Settlement

Costa Rica’s high level of Foreign Direct Investment (see “Openness to Foreign Investment” above) inevitably brings the occasional new investment dispute in which the US investor alleges wrongdoing on the part of the Costa Rican government. These cases may be resolved administratively or through the legal system. Each dispute case has its own unique circumstances which nevertheless tend to highlight the persistent themes of contradictory decisions between or within government institutions as well as a governmental reluctance to act and a tendency to draw procedures out to the degree permitted by law.

Costa Rica uses the Roman civil law system rather than common law. The fundamental law is the country’s Political Constitution of 1949, which grants the unicameral legislature a particularly strong role. The civil and commercial codes govern commercial transactions. The courts are independent, and their authority is respected. The roles of public prosecutor and government attorney are distinct: the Chief Prosecuting Attorney or Attorney General (“Fiscal General”) operates a semi-autonomous department within the Judicial branch while the government attorney or State Litigator (“Procurador General”) works within the Ministry of Justice and Peace in the Executive branch. Judgments of foreign courts and arbitration panels may be accepted and enforced in Costa Rica through the exequatur process. The Constitution specifically prohibits discriminatory treatment of foreign nationals.

Monetary judgments are usually made in Costa Rican colones. However, if the dispute involves a dollar-denominated transaction, the award may first be calculated in dollars and then converted to colones for payment.

Litigation can be long and costly. Some representatives of US companies have cited the unpredictability of outcomes as a source of rising judicial insecurity in Costa Rica. The legal system is significantly backlogged, and civil suits may take five years or more from start to finish. Some U.S. firms and citizens have satisfactorily resolved their cases through the courts, while others have seen proceedings drawn out over a decade without a final ruling. The process to resolve both civil and penal squatter cases through the courts can be especially cumbersome. Also, civil archives recording land title are at times incomplete or contradictory. Potential buyers should retain experienced legal counsel and carefully conduct due diligence to ensure that properties are free of conflicting ownership claims.

Arbitration is theoretically possible under the civil and commercial codes. However, U.S. investors have experienced mixed results from such proceedings organized by local attorneys. A 1998 law governing alternative conflict resolution (Law 7727) sought to encourage arbitration and simplify the procedures under which arbitration takes place. Several arbitration centers operate, including one at the Costa Rican - American Chamber of Commerce. Some cases reportedly have been successfully and quickly resolved under the law. Potential litigants should be careful to ensure that their attorneys have skills and experience specifically in arbitration.

Costa Rica has been a member of the International Center for the Settlement of Investment Disputes (ICSID) since 1993, when it acceded to the Washington Convention. Since then, the ICSID has successfully resolved Costa Rican cases having to do with land expropriation and investment. Costa Rica is also a member of the World Bank Multilateral Investment Guarantee Agency (MIGA), which provides a forum for international arbitration in investment disputes, as well as investment guarantees. Private energy producers have included international arbitration clauses in their contracts. Costa Rica has not joined the United Nations Protocol for the Compulsory Settlement of Disputes between Countries.

The provisions of Chapter 10 of CAFTA-DR ensure that Costa Rica will submit to international arbitration if the aggrieved investors choose that option. The arbitration process under CAFTA-DR is designed to be open and transparent; hearings and documents are public, and amicus curiae submissions are expressly authorized. The CAFTA investment chapter includes checks to help assure that investors do not abuse the arbitration process. The agreement includes a provision that allows tribunals to dismiss frivolous claims and award attorney’s fees and filing costs. Potential plaintiffs should be aware that arbitration attorneys’ fees and other costs can easily exceed 1 million USD and the so-called “no U-Turn” provision ensures that once a plaintiff has taken the case to arbitration it cannot return to local courts. Furthermore, arbitration settlements never mandate a change in local law or judicial outcome but rather specify monetary amounts to be paid to the plaintiff. No arbitration cases have yet been filed under the provisions of CAFTA-DR during CAFTA-DR’s first three years.

The Costa Rican bankruptcy law, addressed in both the commercial code and the civil procedures code, is similar to corresponding U.S. law. Title V of the civil procedures code outlines creditors’ rights and the processes available to register outstanding credits, administer the liquidation of the bankrupt company's assets, and pay creditors according to their preferential status. As in the U.S., penal law will also apply to criminal malfeasance in some bankruptcy cases.

Performance Requirements and Incentives

Three investment incentive programs operate in Costa Rica: the free trade zone system, a so-called active finishing regime, and a duty drawback procedure. These incentives are available equally to foreign and domestic investors. These incentives include tax holidays and training of specialized labor force.

Individual companies are able to create industrial parks that qualify for Free Trade Zone status by meeting specific criteria and applying for such status with Costa Rica’s Foreign Trade Promotion Authority (PROCOMER). Presently, there are 256 companies active under the FTZ regime in Costa Rica. Companies in FTZs receive exemption from virtually all taxes for eight years and at a reduced rate following that period. In addition to the tax benefits, companies operating in FTZs enjoy simplified investment, trade and customs procedures, which provide a convenient way to avoid Costa Rica’s burdensome business licensing process. The tax holidays provided for investment in FTZ manufacturing companies are scheduled to phase out in accordance with World Trade Organization (WTO) agreements by 2015, to be replaced by Law 8794 which eliminates explicit export incentives and replaces them with favorable tax treatment of specific types of company or organization. The WTO-mandated change does not apply to those companies that export only services. Call centers, logistics providers, and software developers are among the companies that may benefit from FTZ status but don’t physically export goods. Such service providers have become increasingly important participants in the free trade zone regime.

The active finishing regime, created by decree in 1997, suspends taxes for renewable one-year periods on imported inputs of qualifying companies, and then exempts the inputs from those taxes when the finished goods using or containing them are exported. The regime also facilitates a five-year renewable suspension of taxes on capital goods used to manufacture exported goods. Companies within this regime may sell to the domestic market if they have registered to do so and pay pro rata import duties on capital equipment used for the domestic market. Finally, the drawback procedure provides for rebates of duties or other taxes that have been paid by an importer for goods subsequently incorporated into an exported good.

While Costa Rica does not impose requirements that foreign investors transfer technology or proprietary business information or purchase a certain percentage of inputs from local sources, the Costa Rican agencies involved in investment and export promotion do explicitly focus on categories of foreign investor who are likely to take such actions while encouraging local supply chain development and cooperation with local universities.

While the procedures necessary to obtain residency in Costa Rica are traditionally long and very bureaucratic, immigration officials believe that an immigration law that took effect in March of 2010 and Costa Rica’s accession to the Apostille Convention, in effect as of December 2011, make the process less burdensome. In any case, existing immigration measures do not appear to have inhibited foreign investors’ mobility to the extent that they affect Foreign Direct Investment in the country.

Right to Private Ownership and Establishment

All private entities and persons, domestic or foreign, may establish and own businesses and engage in all but a few forms of remunerative activity. The exceptions are in sectors that are reserved for the state (legal monopolies) or that require participation of at least a certain percentage of Costa Rican citizens or residents (electrical power generation, broadcasting and professional services). Under CAFTA-DR, the insurance and a part of the telecommunications sectors have been opened to competition. In other activities, such as medical services, state firms operate, but that does not preclude private sector competition, which generally receives equal treatment to state companies. Three banks owned by the state receive some advantages over their 11 private competitors, namely that they cannot be forced into bankruptcy, a guarantee not afforded to private banks.

Protection of Property Rights

Investment in Costa Rican real estate requires care; many U.S. real estate investors have found it difficult to obtain clean title, have suffered adverse possession by squatters or have found themselves working with unscrupulous lawyers. Landowners should be sure to demonstrate a continuing presence on and control over their land. Secured interests in both chattel and real property are recognized and enforced, and mortgage and title recording is mandatory. The laws governing investments in land, buildings and mortgages are generally transparent. However, there are continuing problems of overlapping title to real property and fraudulent filings with the National Registry, the government entity that records property titles. Similar to fraudulent filings, investors have faced difficulties with transactions involving property located in indigenous protected zones that has been represented as property without other claims or risk of expropriation. Investors should exercise appropriate due diligence when conducting transactions dealing with land in indigenous zones as they may either be unable to obtain free and clear title or risk future expropriation. While title guaranty is not a service traditionally offered in the country, several reputable companies offer title guaranty and related services.

Investment in beachfront property in Costa Rica faces a unique set of circumstances. Almost all beachfront is public property for a distance of 200 meters from the mean high tide line, with an exception for long-established port cities. The first 50 meters from the mean high tide line cannot be used for any reason by private parties. The next 150 meters, also owned by the state, can only be leased from the local municipalities for specified periods and particular uses, such as tourism installation or vacation homes. Investors should exercise caution and obtain qualified legal counsel before purchasing property, particularly near beachfront areas. Potential investors in Costa Rican real estate should also be aware that the right to use traditional paths is enshrined in law and can be used to obtain court-ordered easements on land bearing private title. Disputes over easements are particularly common when access to a beach is an issue.

Costa Rica is a signatory of many major international agreements and conventions regarding intellectual property. Building on the existent regulatory and legal framework, CAFTA-DR required Costa Rica to further strengthen and clarify its IPR regime, with several new IPR laws added to the books in 2008. Prior to that, the GATT agreement on Trade Related Aspects of Intellectual Property (TRIPS) took effect in Costa Rica on January 1, 2000. Costa Rica in 2002 ratified the World Intellectual Property Organization (WIPO) “internet treaties” pertaining to Performances and Phonograms (WPPT) and Copyright (WCT). In August 2009, Costa Rica modified its WPPT commitments in a way consistent with its international obligations by notifying the WIPO of its reservations to Article 12 of the Rome Convention and Article 15.1 of the WIPO Performance and Phonograms Treaty (WPPT). These reservations together with a subsequent modification of Costa Rican law effectively exempt Costa Rican over-the-air broadcasters from payment of “neighboring rights” to music performers and producers.

While the legal framework governing intellectual property is basically in place, Costa Rica does not adequately enforce those rights. In 2011 Costa Rica remained on the Watch List in the United States Trade Representative’s (USTR) annual Special 301 Report. The USTR noted that IPR enforcement with respect to copyright piracy and trademark counterfeiting required greater priority and resources. Significant delays in judicial proceedings and a lack of official investigators, public prosecutors, and criminal and civil judges specializing in intellectual property continue to hamper effective enforcement.

Transparency of Regulatory System

Costa Rican laws, regulations and practices are generally transparent and foster competition, except in the sectors controlled by a state monopoly, where competition is explicitly excluded. Tax, labor, health and safety laws are not seen as interfering with investment decisions. When applying environmental regulations, the Costa Rican organization that reviews environmental impact statements has been slow in issuing its findings, causing delays for investors in completing projects.

There are several independent avenues for appealing regulatory decisions, and these are frequently pursued by persons or organizations opposed to a public sector contract or regulatory decision. The avenues include the comptroller general (Contraloria General de la Republica), the Ombudsman (Defensor de los Habitantes), the public services regulatory agency (ARESEP), and the constitutional review chamber of the Supreme Court. The State Litigator’s office (Procurador General de la Republica) is frequently a participant in its role as the government’s attorney.

The process has kept the regulatory system relatively transparent and free of abuse, but it has also rendered the system for public sector contract approval exceptionally slow and litigious. There have been several cases in which these review bodies have overturned already-executed contracts, thereby interjecting uncertainty into the process. Bureaucratic procedures are frequently long, involved and can be discouraging to new investors.

A similarly transparent process applies to proposed laws and regulations. The Legislative Assembly generally provides ample opportunity for supporters and opponents of a law to understand and comment upon proposals. To become law, a proposal must be approved by the Assembly by two plenary votes. The signature of ten legislators (out of 57) is sufficient after the first vote to send the bill to the Supreme Court for constitutional review. Regulations must go through a public hearing process when being drafted.

Efficient Capital Markets and Portfolio Investment

There are no controls on capital flows in or out of Costa Rica or on portfolio investment in publicly traded companies. Larger investors often arrange their financing abroad where rates tend to be lower and lending limits are higher. Foreign investors are able to borrow in the local market, but they are also free to borrow from abroad. Some capital flows are subject to a withholding tax (see “Conversion and Transfer Policies”, above).

Within Costa Rica, long-term capital is scarce. Dollar-denominated mortgage financing is popular and common, even for Costa Ricans who do not earn their income in dollars, because of more favorable lending terms for dollar-denominated vs. colon-denominated loans. As an alternative to encourage long-term credit, since 2005 the government has published the value of “Development Units” (“Unidades de Desarrollo”), an inflation-adjusted index value that may be used to denominate debt transactions. There is a small secondary market in commercial paper and repurchase agreements. The securities exchange (Bolsa Nacional de Valores) is small and is dominated by trading in government bonds. Stock trading is of limited significance and involves less than ten of the country’s larger companies, resulting in an extremely illiquid secondary market. However, the securities exchange is actively promoting programs in several promising areas including currency contracts, small stocks and venture capital.

Credit is generally allocated on market terms, although the state-owned banks are expected to participate actively in activities deemed to be of public interest. A “development bank” structure began functioning in 2009 and mandates that 17 percent of resources from private banks’ checking and savings accounts be destined to small and mid-sized companies. A bank may develop its own program of development lending or cede the funds to an administering bank. While several private banks have expressed some interest in administering those resources, mandated conditions (including a very narrow lending margin and a regulatory requirement that standard risk metrics apply to these loans) have stymied the program to date. In recent years, smaller private banks have been absorbed by large multinationals, so that Costa Rica currently hosts subsidiaries of HSBC, Citibank and Scotiabank. Nevertheless, the three state-owned commercial banks are still dominant, accounting for 43.5 percent of the country’s financial system’s assets as of November 2011.

Consolidated total assets of the country’s public commercial banks were approximately USD 13.64 billion in November 2011, while consolidated total assets of the eleven private commercial banks were approximately USD 9.5 billion. The combined assets of all bank groups (including affiliated pension funds and brokerage houses, plus factoring houses and credit unions) were approximately USD 31.4 billion as of November 2011. The Costa Rican banking system has been notably stable in recent years.

Costa Rica’s national council for the supervision of the financial system (CONASSIF) oversees Costa Rica’s financial sector and consists of four principal components. The country’s general superintendent of financial institutions (SUGEF) regulates banks and other financial institutions. The general superintendent of securities markets (SUGEVAL) oversees the securities exchange. The general superintendent of pensions (SUPEN) oversees pension funds. The superintendent of insurance (SUGESE) oversees all insurance operators. The Costa Rican government is working to strengthen supervision of the financial sector with assistance from international donors. Legal and accounting systems are transparent and consistent with international norms. Many well-known accounting firms in Costa Rica are affiliated with large U.S. firms.

Costa Rican banks have not shown themselves to possess takeover defenses designed to prevent foreign capital from entering the market, as evidenced by the relatively high number of bank ownership transactions by foreign bank groups in the past 15 years in Costa Rica. The largest (state owned) banks are not subject to takeover in any case while private banks have changed hands or merged as determined by their owners. The Costa Rican financial regulatory system does not appear to have presented a significant obstacle to this merger and acquisition activity.

Competition from State-Owned Enterprises

State enterprises have enjoyed monopolies in the sectors of wireless telephony, data telecommunications, and insurance; however, CAFTA-DR opened these specific sectors up to market competition. On the telecommunications side, the telecommunications regulation board “SUTEL” and the Telecommunications Vice Ministry have worked since 2009 to build the framework of a competitive telecommunications sector, with progressive development of a regulated competitive telecommunications market for internet and Voice-Over Internet Protocol (VOIP), corporate networks and cell phones. Two cellular phone competitors to the state monopoly “National Electrical (and telecommunications) Institute” (“ICE”) successfully launched their operations in November of 2011, fulfilling a key CAFTA-DR provision that the cell phone market be opened to multiple competitors. On the insurance side, a number of private insurers are actively competing in Costa Rica’s insurance market against state-owned insurance provider National Insurance Institute (INS). Both the insurance regulator SUGESE and telecom regulator SUTEL have won praise for successfully managing market transitions although in both markets new market entrants point to unfair advantages enjoyed by the incumbent operator. This has been particularly notable in the insurance market where specific concerns include deceptive advertising by the former monopoly provider, disparities in approvals/disapprovals for similar or identical products, overly burdensome/inappropriate regulatory requirements, price undercutting by the former monopoly, and the use of exclusivity contracts which prevent some insurance retailers from selling the products of the new market entrants. The new insurance market entrants continue to work with each other and the regulator SUGESE to address these concerns.

Fixed-line telecommunications as well as energy generation and distribution remain firmly in the control of state enterprises. Transport infrastructure (airports, ports, roads) is likewise controlled by the state, although the government successfully managed the development of a major highway concession, granted an airport concession in 2010, and is pursuing public-private partnership arrangements with Costa Rica's major port. Petroleum imports are monopolized by the state petroleum company “RECOPE.”

Each state-owned enterprise has its own independent board of directors and internal operating regulations and procedures. The comptroller general’s office (which reports directly to the Legislative Assembly) exercises fiduciary oversight and supervision of all public entities, including the state-owned enterprises. Costa Rica’s state-owned enterprises do not appear to take direct orders from the Executive Branch; nevertheless, the state-owned enterprises clearly strive to fulfill their role as publicly-owned entities. Recent examples of this orientation have been the Banco Nacional’s proposed trust arrangement for financial management of the new National Stadium, Banco de Costa Rica’s (BCR) issuance of licenses and passports, ICE’s strong support of the Executive Branch’s Digital Government procurement system “MerLink” and RECOPE’s continued cooperation with ICE in providing fuel to the Garabito electrical generation plant.

Beyond the telecommunications, insurance, electricity, transport and petroleum sectors, the country has a generally open international trade and investment regime. Costa Rica does not have a Sovereign Wealth Fund.

Corporate Social Responsibility

There is a general awareness of corporate social responsibility (CSR) among both producers and consumers in Costa Rica. Large multinational companies commonly pursue CSR goals in line with their corporate goals and have found it beneficial to publicize such CSR activities in Costa Rica. Many smaller companies, particularly in the tourism sector, have likewise integrated CSR activities into their way of doing business. The U.S.-based multinational INTEL was a finalist for the U.S. State Department’s Award for Corporate Excellence in 2009 and 2010 because of its outstanding CSR program in Costa Rica.

Political Violence

Costa Rica has not experienced significant domestic political violence since 1948. There are no indigenous or external movements likely to produce political or social instability. However, Costa Ricans occasionally follow a long tradition of blocking public roads as a way of pressuring the government to address grievances; the traditional government response is to respond slowly, thus giving the grievances time to air. This practice on the part of peaceful protesters can cause logistical chaos.

Corruption

Costa Rica has laws, regulations, and penalties to combat corruption, though the resources available to enforce those laws have been limited. Corruption became a major issue in 2004, when two former presidents and a number of officials at public institutions were placed in pre-trial detention on corruption charges. One former president was convicted in 2009; the other was convicted in 2011, and his case is still under appeal. Allegations of lower-level corruption are common, and some prosecutions have resulted.

Costa Rica ratified the Inter-American Convention Against Corruption in 1997. This initiative of the Organization for Economic Cooperation and Development (OECD) and the Organization of American States (OAS) obligates subscribing nations to implement criminal sanctions for corruption. Costa Rica also ratified the UN Convention Against Corruption in March 2007. The attorney general (Fiscal General de la Republica), state litigator (Procuraduria General de la Republica), comptroller general (Contraloria General de la Republica) and ombudsman (Defensoria de los Habitantes) work in conjunction with each other in an effort to combat corruption. The comptroller general, the Organization of Judicial Investigation (OIJ), and the public prosecutors' office investigate allegations of corruption. The comptroller general is responsible for approving or rejecting public contracts, auditing results, and detecting instances of corruption.

While U.S. firms have not identified corruption as a major obstacle to doing business in Costa Rica, some have made allegations of corruption in the administration of public tenders and in approvals or timely processing of permits. Developers of tourism facilities periodically cite municipal-level corruption as a problem when attempting to gain a concession to build and operate in the restricted maritime zone.

Acts of bribery, including those directed against government officials, are criminal acts punishable by imprisonment. Public officials convicted of receiving bribes are subject to prison sentences up to ten years, according to the Costa Rican Criminal Code (Articles 340-347). Entrepreneurs may not deduct the costs of bribes or any other criminal activity as business expenses. In recent years, Costa Rica has seen several publicized cases of firms prosecuted under the terms of the US Foreign Corrupt Practices Act for corrupt acts committed to the detriment of Costa Rican institutions.

Bilateral Investment Agreements

Costa Rica has Bilateral Investment Treaties (BITs) in force with Argentina, Canada, Chile, the Czech Republic, France, Germany, Korea, the Netherlands, Paraguay, Spain, Switzerland, Taiwan, and Venezuela. The investment chapter of CAFTA-DR includes all aspects of a BIT thereby making the negotiation of a separate BIT with the United States unnecessary.

OPIC and Other Investment Insurance Programs

The Overseas Private Investment Corporation (OPIC) offers both financing and insurance coverage against expropriation, war, revolution, insurrection and inconvertibility for eligible U.S. investors in Costa Rica. OPIC can provide insurance for U.S. investors, contractors, exporters and financial institutions. Financing is available for overseas investments that are wholly owned by U.S. companies or that are joint ventures in which the U.S. firm is a participant. OPIC holds a diversified portfolio of some 350 active finance clients and 200 active insurance clients. In Costa Rica, OPIC’s portfolio exposure in 2010 totaled USD 168.2 million. The bulk of the portfolio consists of projects in housing, mortgage lending and finance.

U.S. investors should be aware that OPIC, in accordance with statutory requirements, may not offer insurance to projects with a detrimental effect on the U.S. balance of payments or employment. These statutory requirements have led OPIC to offer only limited insurance coverage for textile and citrus investments. The Government of Costa Rica approves prospective OPIC-insured projects taking into account possible balance of payments or labor problems. Costa Rica is a member of the Multilateral Investment Guarantee Agency, a member of the World Bank group.

In the event that OPIC should pay an inconvertibility claim, the local currency accepted by OPIC would be made available, pursuant to the bilateral agreement providing for the OPIC program, to the U.S. Embassy in Costa Rica. U.S. Embassy yearly expenses in local currency are calculated to be roughly USD 8.5 million.

Labor

The Costa Rican labor force is relatively well-educated compared to other countries in Central America. While Costa Rica has historically placed a high priority on education and the creation of a skilled work force, long-term government investment in education fell behind in the past decade. The country claims a literacy rate of 96 percent. Costa Rica’s national vocational training institute (INA) and private sector groups provide technical and vocational training.

The rapid growth of Costa Rica’s service, tourism and technology sectors has stimulated demand for English-language speakers and prompted the Costa Rican Government to declare English language and computer literacy to be a national priority at all levels of education. However, only 11 percent of Costa Ricans are proficient in English. An analysis by the Costa Rican government found that a shortage of English-speaking workers is causing the country to “lose opportunities in its competitive position because its labor pool has limitations.” Testing in 2008 revealed that about 38 percent of teachers of English in public schools did not possess adequate basic English skills and were consequently seriously deficient in their ability to teach English; the Ministry of Education has been actively identifying and training those instructors. Several public and private institutions have also been active in Costa Rica’s drive to English proficiency, including the 60-year-old U.S.-Costa Rican binational center (the Centro Cultural Costarricense Norteamericano), which offers general and business English courses to as many as 5,000 students annually, and receives U.S. government funding. In 2010, the Peace Corps initiated a program in Teaching English as a second language. While the presence of companies such as Intel, Procter & Gamble, Western Union, and a growing number of call center operators and business process outsourcing (BPO) companies has drawn down the supply of speakers of fluent business and technical English, the pool of job candidates with English skills in the Central Valley has been sufficient to meet current demand. In other parts of the country such as Guanacaste, however, a lack of English speakers has the potential to stifle growth in tourism, real estate and other sectors, according to the Costa Rican government.

Costa Rican law guarantees the right of workers to join labor unions of their choosing without prior authorization. Unions operate independently of government control and may form federations and confederations and affiliate internationally. The vast majority of unions are located in the public sector, including state-run enterprises. In the private sector, many Costa Rican workers join “solidarity associations,” under which employers provide easy access to saving plans, low-interest loans, health clinics, recreation centers, and other benefits. While this Solidarity Movement has long been influential in Costa Rica, a new 2011 law solidified that status by giving solidarity associations constitutional recognition comparable to that afforded labor unions. Solidarity associations and labor unions coexist at some workplaces, primarily in the public sector. Business groups claim that worker representation by solidarity associations provide for better labor relations compared to firms with workers represented only by unions. However, labor unions allege that private businesses use solidarity associations to hinder union organization in contravention of International Labor Organization rules.

The constitution protects the right of workers to organize. The Labor Code enacted in 1943 provides protection from dismissal for union organizers and members and requires employers found guilty of anti-union discrimination to reinstate workers fired for union activities. However, the labor courts are backlogged and the legal process can be lengthy.

Foreign-Trade Zones/Free Trade Zones

Free trade zones operate near the port cities of Limon/Moin (Caribbean) and Puntarenas (Pacific) as well as in various central valley locations. The benefits, primarily fiscal, are described in the section entitled Performance Requirements and Incentives.

Foreign Direct Investment Statistics

Total Foreign Direct Investment Flows into Costa Rica

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Year

Amount (USD Million)

Percent of GDP

2010

1,466

4.3%

2009

1,347

4.6%

2008

2,078

7%

2007

1,896

7.2%

2006

1,469

6.5%

2005

861

4.3%

2004

794

4.3%

2003

575

3.4%

2002

659

4.1%

2001

460

2.8%

2000

409

2.6%

Top Ten 2010 Foreign Direct Investment by Country of Origin, Percent of Total

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Country

Amount (USD Million)

Percent of Total

United States

1,024.8

70%

Colombia

98.9

6.7%

Switzerland

67.7

4.6%

Canada

48.7

3.3%

Mexico

40.4

2.8%

Panama

37.2

2.5%

Guatemala

33.4

2.3%

Spain

28.4

1.9%

Germany

21

1.4%

England

15.1

1.0%

Others

50

3.5%

Total

1,465.6

2010 Foreign Direct Investment, by Sector

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Sector

Amount (USD Million)

Percent of Total

Manufacturing Industry

965.9

65.9%

Real Estate

147

10%

Services

85.4

5.8%

Tourism

81

5.5%

Financial

70

4.8%

Commerce

62.1

4.2%

Agriculture & Ag Industry

30.6

2.1%

Others

23.6

1.6%

Total

1,465.6

Source: Central Bank of Costa Rica

Current Stock of FDI

The CIA World Factbook estimate of Costa Rica’s accumulated Foreign Direct Investment as of December 31, 2010 is $13.5 billion (40% of GDP). Conversely, Costa Rica is estimated to have $88.3 million in Foreign Direct Investment abroad.

Partial List of Major U.S. Investors in Costa Rica:

Abbot
Aegis
Baxter
Boston Scientific
Chiquita
Citibank
Conair
Del Monte
Emerson Electric
General MicroCircuits
Hewlett-Packard
Hospira
IBM
Intel
Kimberly-Clark
McDonalds
Merck
Microvention
National Instruments
Pfizer
Price Smart
Procter and Gamble
Scott Paper
Standard Fruit Company (Dole)
Star Tek
St. Jude Medical
Sykes
Vanity Fair
Wal-Mart
Western Union

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