José Ramón PereaAnnalisa PrimiOECD Development Centre San José, Costa Rica July 31st, 2012
Outline of the report 1. Costa Rica as a knowledge economy: achievements and challenges 2. Strategy, governance and policy mix for attracting knowledge- intensive FDI to Costa Rica 3. A road map for policy action2
A long-standing democracy and a stable macroeconomic environmentRobust GDP growth since the 60s, only halted with the arrival of the Debt Crisis. GDP growth, Costa Rica, 1960-2011- Post-crisisperformancecharacterized bygreater GDPgrowth volatility,although betterthan many otherLatin Americancountries. 3 Source: Authors’ calculations based on World Bank data.
A remarkable record in per capita income GDP growth patterns has left Costa Rica with one of the highest per capita income level of the region. Latin America, GDP per capita 1985-2009 - By 2009, Costa Rica’s per capita income was the fourth highest among a comprehensive sample of Latin American countries. - Growth has facilitated the task of poverty alleviation, which is reduced substantially. Extreme poverty is reduced more acutely.4 Source: Authors’ calculations based on Penn World Tables.
Costa Rica relied heavily on FDI attraction FDI, selected economies, 1985-2010 (net inflows as percentage of GDP) Source: Authors’ calculations based on World Bank data5
A proven track record in FDI attraction Number of companies in knowledge- intensive activities, Costa Rica, 1960-2011 Source: CINDE, April 2012.6
FDI became a stable source of external financing Balance of payments, Costa Rica, 1990-2010 7 Source: Authors’ elaboration based on International Monetary Fund (IMF).
FDI contributed to job creationNumber of jobs created by FDI projects inCosta Rica by sector (2003-05 and 2009-11)Note: Total number of FDI-related jobs created for each period forgreen field projects: 2003-05:7 758 jobs; 2009-11: 34 385 jobs.Source: Authors’ calculations based on fDi Intelligence, 2012. 8
FDI fostered export diversification and upgradingCosta Rica evolved from an export structure which was highlyconcentrated on agricultural products and textiles and garments…Costa Rica: Product Space(1988) 9 Source: Authors’ calculations based on Feenstra et al. (2005).
…to a more diversified export structure with new, more sophisticated products.Costa Rica: Product Space(2008)- Costa Rica is an “outlier”in the Product Space: theaccrual of export-orientedFDI to technology-intensivesectors allowed the countryto “jump” into areas far fromthe country’s originalcompetitiveness 10 Source: Authors’ calculations based on COMTRADE.
But ... Costa Rica needs to strengthen its national innovation system The commitment to invest in innovation is very low R&D intensity and the role of the private sector, OECD and non-OECD economies, 2009 Source: Authors’ calculations based on data from UNESCO, RICYT and the OECD Main Science and Technology Indicators database. 11
Skills are a critical factor for FDI attraction, but... Determinants of FDI in Costa Rica and in selected economies, 2003-12 (% of total motive-citing investing companies) Notes: Often more than one investment motive is recorded for any investing company; hence the sum of share of companies mentioning a certain motive exceeds 100%. The share of companies for which investment motives are recorded over the total number of investing companies varies by country: Costa Rica: 51.1%, Malaysia: 51.3%, China: 38.4%, India: 43.6%. Data12 recorded from Jan 2003 - March 2012. IPA means Investment Promotion Agency. Source: Authors’ calculations based on fDi Intelligence data, 2012.
...there is a mismatch between skilled-labour supply and production structure needs. Profile of PhDs by area of specialisation, shares over total, Costa Rica, Chile and Mexico, 2000-09 Source: Authors’ calculations based on RICYT data. 13
Linkages between foreign and domestic companies are also low .due to several reasons: Domestic credit provided by the banking sector, 2010 (% GDP)Limited access to finance fordomestic companiesLack of certifications andstandardsLow domestic capabilitiesLittle demand from MNCs 14 Source: Authors’ elaboration based on World Bank data.
1. Costa Rica as a knowledge economy: achievements and challenges 2. Strategy, governance and policy mix for attracting knowledge- intensive FDI to Costa Rica 3. A road map for policy action15
The national strategy for FDI in Costa Rica: prioritising knowledge-intensive FDI3 approaches to FDI attraction: Horizontal Selective Systemic (or Integrated) Costa Rica - Target of attracting USD 9 billion by 2014, half of which should come from productive investment. 16
The challenge of clarifying the objectives Policy priorities for FDI attraction in innovation-related activitiesNote: x indicates the level of priority (x = priority; xx= higher priority).Source: Authors’ elaboration based on OECD (2010) and consultations with Costa Rican Government institutions carried out by the OECDDevelopment Centre in 2011.17
The challenge of increasing policy co-ordination Note: COMEX and MICIT interact with other ministries in designing and implementing FDI policies, including the Ministry of Planning, which is in charge of setting overall national development targets, and the Ministry of18 Education. Source: Authors’ elaboration.
The challenge of managing a more complex policy mix Policy mix Framework Investment Fiscal Incentives for Incentives for conditions promotion incentives talent creation innovation and S&T and retention development 19
The challenge of facing a new scenario Rising competition to attract high value addedGlobal and knowledge-intensive FDIchanges New potential investors, beyond additional partners Rising uncertainty regarding the future of production unbundlingDomestic Learning in policy making in Costa Ricachanges Accumulated business capacities Rising prioritisation of innovation in Latin America20
The new landscape requires an enhanced policy framework21 Source: Authors’ elaboration.
A Road Map for policy action: what are the suggested actions?1. Strengthening political The Presidential Council for Competitiveness and Innovation needs to have more enforcement power toleadership and elaborate shared guidelines and priorities to foster policyhorizontal co-ordination co-ordination Creating a small and agile observatory-type institution2. Increasing diagnostics under the direction of the Presidential Council forcapabilities Competitiveness and Innovation could help in monitoring policy implementation and assessing impact. Avoiding the risk of dualism FDI and the rest of the economy can be tackled also through culture.3. Promoting the cultureof a knowledge-driven Costa Rica needs to break the vicious cycle thatsociety simplistically associates knowledge and technology with foreign action and traditional activities with domestic agents. 22
Road Map for Policy Action4. Updating the Additional effort is needed to familiarise potential investors –country branding and and the global community in general – with the new Costa Rica.fostering outreach5. Diversifying and Investment promotion in Costa Rica has been very effective,updating investment but there is a need to look at other markets as potential sources for FDI .promotion activity6. Improving the Need to increase the quality and quantity of the skilled labourquality and supply of force, especially in science and engineering. Costa Rica could create a fund for skills developmentthe skilled labour supported by contributions from the government and MNCs.force 23
Road Map for Policy Action Increase the budget for innovation policy7. Improving the policy Improve the policy mix (ex. Business incubators and newmix and channeling generation of techno parks)more resources to Improve the design of innovation incentive schemes Fostering the development of linkages between MNCs andinnovation domestic companies Strengthening its research capacities in universities and 8. Improving local research centers. research capabilities Costa Rica’s small size is a critical factor. The country will need to take a selective approach 24
Conclusions Prioritising knowledge-intensive FDI is a strategic option for Costa Rica. However, this is not a low-hanging fruit. It will require strong government commitment, leadership, horizontal co-ordination and financial resources. The enhanced policy framework will not be a “zero-cost” change, as it will require mobilising higher public resources. Higher resources are not in themselves a guarantee of success; they require effective planning and management; but below a critical mass of public budget, even the most well-designed plan will face implementation obstacles. This is even truer in innovation-related domains, where public effort needs to be backed by private investment .25