Tutt- Master's Thesis- Final

Costa Rica and the Costs of Foreign Direct Investment Led Development: A Look at the
Limited Ability that Small, Dependent, Underdeveloped Countries have to Attract Foreign
Direct Investment.
By
Joseph Tutt
Submitted to
The Wilf Family Department of Politics
New York University

in partial fulfillment
of the requirements for the degree of
Master of Arts
Project Sponsor: Professor ___Muserref Yetim
Signature __ _
(For Departmental Use Only)
MA Project Committee: Professor ________________
Professor ________________
New York City, USA
2009
Abstract: This paper investigates Costa Rica’s foreign direct investment attraction strategy
for the past thirty years. The literature on foreign direct investment led development mostly focuses
on the comparative effects of different domestic policies on attracting foreign investors and
increasing technological spillovers. The case of Costa Rica has often been held up as an ideal
example. However, examinations of Costa Rica’s have largely ignored the fact that their strategy
was heavily dependent on external resources, both monetary and technical, suggesting that the
process of investment attraction is more extensive and costly than the literature has previously
acknowledged. Specifically, overcoming the information inequality between transnational firms and
underdeveloped countries and adequately investing in public goods such as worker skills and
infrastructure, that are necessary to attract growth spurring investment requires resources that less
developed countries are not likely to be able to afford.
Acknowledgements – The author would like to recognize the great assistance provided by
Professors Muserref Yetim and Tony Spanakos in helping guide the construction of this paper. Their
revisions and critiques provided immeasurable help in completing this project. He would also like
2

to extend gratitude to the entire Wilf Family Department of Politics at New York University for its
excellent resources and assistance in writing this paper. Finally, he would like to thank his loving
family for their unending support.
Table of Contents
List of Tables and Figures
List of Abbreviations
CACM – Central American Common Market
CAFTA – Central American Free Trade Agreement
CBI – Caribbean Basin Iniative
CENPRO – Centro de Promociones de Exportaciones e Inversiones.
CINDE - Coalición Costarricense de Iniciatívas para ed Desarrollo
CRP – Costa Rican Proveé
ECLA- Economic Commission on Latin America
FDI – foreign direct investment
FUNDEX - Fundación de Exportaciones
GDP- gross domestic product
GNP – gross national product
HDI- Human Development Index
IPA – investment promotion agency
ISI- import substitution industrialization
OECD- Organization for Economic Cooperation and Development
PROCOMER- Promotora de Comercio Exterio
LDC – less developed country
USAID – United States Agency for International Development
3

Introduction
Over the last 15 years, Costa Rica has achieved strong growth rates in its overall
economy, and particularly in its nontraditional-export sector. Much of this growth has
been fueled by foreign direct investment (FDI) in the computer chip and medical
industries. Both of these industries are high value-added and involve high-skilled jobs.
Costa Rica is quite unique in the Latin American context, a region where most other
stories of economic growth are highly dependent on either commodity price booms or are
concentrated in industries of low value-added, low skill, and cheap labor.1
Costa Rica’s
1 Robert N. Gwynne and Kay Cristóbal, “Latin America Transformed: Globalization and Neoliberalism.” In
Latin America Transformed: Globalization and Modernity 2nd
ed., eds. Robert N. Gwynne and Kay Cristóbal, (London:
Edward Arnold, 2004): pgs 7-18.
Thomas Klak, “Globalization, Neoliberalism, and Economic Change in Central America and the
Caribbean.” In Robert N. Gwynne and Kay Cristóbal, eds., Latin America Transformed: Globalization and

focus on high-value, high-tech industries, and its strong investment promotion strategy
appear to have Costa Rican growth isolated and cushioned from potential swings in
international commodity prices and labor competition from Asia, both of which have the
potential to derail other growing countries in the region.2
Most literature on FDI and export-led development have focused on comparative
domestic policies seeking to identify which investment attraction policies led to the
highest rates of growth, most technological spillovers, and strongest backwards linkages.3
While designing appropriate long-term-growth oriented investment strategies is certainly
vital, these studies have overlooked the important issue of the cost of the monetary and
technical resources that implementing these policies require and how under-developed
and peripheral countries are then supposed to afford or attain the resources that successful
investment-attraction policies require. Specifically, there are considerable information
asymmetries between potential investors and countries seeking their investment.
Overcoming these asymmetries requires more than just removing trade barriers.4
The case
of Costa Rica suggests that the cost of overcoming these asymmetries is considerably
high. Furthermore, attracting high quality, long-term-growth oriented investments often
require heavy investment in public education, worker skills, and infrastructure to attract
and support high quality firms. Finally, many consider a core component in attracting
Modernity 2nd
ed. (London: Edward Arnold, 2004): pgs 77-84
2 Eva Paus, Foreign Investment, Development, and Globalization: Can Costa Rica Become
Ireland? (New York: Palgrave Macmillan, 2005), 135-143.
3 For a review of the literature on and analysis of FDI led growth policies, see Theodore H.
Moran, Harnessing Foreign Direct Investment for Development. (Baltimore, MD: Brookings Institution
Press, 2006)
4 In a quantitative evaluation of FDI policy, Biglaiser and DeRouen, Jr. found that economic
reforms and tax policy changes did not have a statistically significant effect on attracting more FDI.
Glen Biglaiser and Karl DeRouen, Jr., “Economic Reforms and Inflows of Foreign Direct
Investment in Latin America,” Latin American Research Review 41 No.1 (February 2006): pgs 51-75.

firms to be offering beneficial tax incentives. Thus, investment attraction requires
increased state capacity but no new way of funding the expansion of it.
The literature on Costa Rica has identified the political and institutional stability,
the successful use of free-trade zones, and successful use of a comprehensive investment-
promotion strategy as the key explanatory factors of Costa Rica’s growth.5
While these
endogenous factors have certainly played a key role in Costa Rica’s success, examining
endogenous factors alone do not tell the entire story. The United States Agency for
International Development (USAID) also played a vital role in the Costa Rican success
story, and was heavily involved in funding and planning the country’s investment
promotion strategy throughout the 1980s and early 1990s. Indeed, USAID primarily
provided the resources that allowed Costa Rica and Intel, along with other investors, to
overcome informational asymmetries. Furthermore, Costa Rica received additional
support through aid and preferential trade treatment. Foreign aid allowed Costa Rica to
maintain macroeconomic stability as well as allowed it to expend additional resources on
infrastructure and skill investments. Finally, preferential trade treatment greatly increased
the viability of many US firms investing in Costa Rica. Since the loss of US aid, Costa
Rica has seen its ability to afford its investment promotion strategy drastically decrease.
Without USAID involvement and highly preferential trade treatment that Costa Rica
5 See Paus, Foreign Investment, pgs 12-20, 155-172; Moran, pg 30;
Dilip Mirchandani and Arturo Condo, “Doing Business In: Costa Rica,” Thunderbird
International Business Review 47 No.3 (May 2005): pgs 335-360.
Lynn K Mytelka and Lou Anne Barclay, “Using Foreign Investment Strategically for Innovation.”
European Journal of Development Research 16 No.3 (Autumn 2004): pgs 531-560,
Roy C. Nelson, “Competing for Foreign Direct Investment: Efforts to Promote Nontraditional FDI
in Costa Rica, Brazil, and Chile,” Studies in Comparative International Development 40 No.3 (Fall 2005):
5-16.
Eva A. Paus and Kevin P. Gallagher, “Missing Links: Foreign Investment and Industrial
Development in Costa Rica and Mexico.” Studies in Comparative International Development 43 No.1
(March, 2008): pgs 531-555
Debora Spar, FIAS Occasional Paper 11- Attracting High Technology Investment: Intel’s Costa
Rican Plant. (Washington D.C.: World Bank, 1998): pg 13

received from the US government, Costa Rica’s successful investment strategy would
have, at the worst, never existed or, at least, not have been nearly as successful.6
In this paper, I argue that endogenous factors such as macroeconomic stability and
investment promotion strategy are necessary but not sufficient to achieve economic
growth through FDI, as the case of Costa Rica suggests. Successful investment attraction
is an extensive and costly process, and merely removing trade barriers is not sufficient. It
requires extensive information gathering and lobbying efforts to overcome information
asymmetries, which few under-developed countries are likely to be able to afford. The
main implication of the high costs of attraction and the experience of Costa Rica
suggests, I argue, is that external actors, and more specifically an interested regional
hegemon are the most likely source to provide the necessary funds and information that
are necessary to overcome information asymmetry and afford the necessary investments.
In other words, in the past 30 years, there has been more variation in outcomes than there
has been in liberalization reforms.7
Many countries in Latin America started from roughly
similar circumstances, followed roughly similar liberalization programs and have seen
booms in investment. Yet while Costa Rica has enjoyed the benefits of an Intel computer
chip factory, other countries have seen liberalization only lead to the privatization of
public utilities or devastating monetary speculation bubbles.8
Many countries in Latin
6 Mary A. Clark, “Transnational Alliances and Development Policy in Latin America:
Nontraditional Export Promotion in Costa Rica.” Latin American Research Review 32 No.2 (1997): pgs 71-
94.
7 For an overview of Latin America’s experiences with liberalization reforms see Robert N.
Gwynne and Kay Cristóbal, eds., Latin America Transformed: Globalization and Modernity 2nd
ed.,
(London: Edward Arnold, 2004), Chapters 1-4.
Gwynne and Kay, pg 12.
8 Gwynne and Kay, pgs 12-13; Paus, Foreign Investment, pg 5, 143.
William Assies, “Gasified Democracy,” Revista Europea de Estudios Latinoamericanos y del
Caribe 76 (April 2004): pgs 26-31
Pilar Domingo, “Democracy and New Social Forces in Bolivia,” Social Forces 83 No.4 (June
2005): pgs 1727-1743
Robert Gilpin. The Global Political Economy: Understanding the International Economic Order.
(Princeton, NJ: Princeton University Press, 2001): pg 263

America were only able to liberalize their economies, Costa Rica’s massive inflow of
external aid money allowed it to construct a much more elaborate attraction policy.9
Costa Rica is an important case for two crucial reasons. First, it is small country
with a long history of dependence on agricultural exports, and therefore the Costa Rican
case holds many potentially important lessons for the many small, underdeveloped, trade
dependent countries (to provide some perspective, Costa Rica is near the global median
country size by population and area10
) seeking to achieve developmental gains through an
FDI strategy (which remains the current paradigm for development for a majority of
developing countriesi
).11
Considering the fact that around three quarters of FDI has
consistently flowed between developed industrial nations (See Table 1), instances of
successful FDI attraction and utilization by less-developed countries are important cases
to study.12
Table - Distribution of Global FDI Inflows, 1970-2000
1970 1980 1990 2000
Total In Millions of
Current US Dollars
(Percentages in
Parentheses)
12,926
(100)
54,932
(100)
208,501
(100)
1,392,957
(100)
Developed Countries
US
EU
9,477
(73.3)
1,260
(9.8)
5,127
(39.7)
46,530
(84.7)
16,918
(30.8)
21,317
(39.7)
171,076
(82.1)
48,442
(23.2)
96,773
(46.4)
1,120, 528
(80.4)
314,007
(22.5)
683,893
(49.1)
Daniela Magalhâes Prates and Leda Maria Paulani, “The Financial Globalization of Brazil under
Lula,” Monthly Review 58 no. 9 (February 2007): pg 36.
Susan Spronk and Jeffrey R. Webber, “Struggles against Accumulation by Dispossession: The
Political Economy of Natural Resource Contention” Latin American Perspectives 34 (2007): pgs 31-47
9 Clark, Transnational Alliances, pgs 71-94.
10 Klak, pg 69.
11 See Klak, pg 67-73 and Paus, Foreign Investment, pg 3-6 for a more thorough discussion of the
meaning and consequences of size and trade dependence in Central America.
12 Gilpin, pgs 289-290; Klak, pg 78, Paus, Foreign Investment, pgs 3-5.

Developing Countries
(China not included)
Central America
and Caribbean
Costa Rica
3,449
(26.7
1,063
(8.2)
26
(0.2)
8,301
(15.1)
3,854
(7.0)
53
(0.1)
33,468
(16.1)
4,826
(2.3)
162
(0.1)
205, 285
(14.7)
38,110
(2.7)
409
(0.03)
Source: Modified from Paus, Foreign Investment, pg 4. Original data from
UNCTAD Foreign Direct Investment Database
<http://www.unctad.org/Templates/Page.asp?intItemID=1923>
Second, Costa Rica serves as a most-likely case for successful development
through an export-oriented, foreign direct investment approach due to its favorable
domestic political and demographic characteristics, history, and location. A better
understanding of the considerable information asymmetries that Costa Rica had to
overcome and investments and concessions it was required to make will better clarify the
true costs of FDI attraction policies. Furthermore, by investigating the manner in which
USAID and Costa Rica interacted in order to provide the necessary funds and
information to allow Costa Rica to attract FDI provides valuable insight into the
feasibility of other small, under-developed countries attracting the requisite money and
information. By further studying the entire costs of FDI attraction policies and strategies
scholars and bureaucrats will be able to judge how feasible an FDI led program is in
certain cases, and also will be better equipped to design foreign aide programs likely to
spur economic growth.
In this thesis, I shall analyze Costa Rica’s experience with FDI-led development.
The first section will provide a literature review, and I will look at the role FDI is
theoretically supposed to play in spurring development. The second section will provide
background on Costa Rica’s place in the broader scheme of Latin American development
and what makes it both unique and similar with the rest of the region. This will establish
both why it is a most-likely case, but also outline the considerable obstacles that stood in

the way of Costa Rica’s success. This will highlight Costa Rica’s strong need for external
resources in order overcome informational asymmetries and make public investments. In
the third section, I will look at Costa Rica’s implementation of the neoliberal reforms and
its growth through FDI in the 1990s. In the fourth section, I will examine the central role
that external actors and resources played in Costa Rica’s experience and its implications
on the broader FDI literature. Finally, I will offer a discussion section about aspects of the
world economy and under-developed countries that the current FDI literature has
neglected and that the experience of Costa Rica suggests needs to be incorporated into
models and theories on FDI-led growth.
The Link Between FDI and Development
The role that FDI is supposed to play in facilitating economic development has its
roots in theories on economic development and globalization. As far as developmental
theories are concerned, theories founded on FDI are best classified under the neoliberal
paradigm. Neoliberal theories have their roots in the 1960s and grew out of the critiques
of theories of the developmental state and import substitution industrialization (ISI).
Theories of the developmental state have their origins in Friedrich List’s studies on the
role of the German state in spurring Germany’s rapid industrialization in the late
nineteenth century. The ISI model has its origins in the 1940s and 1950s with authors
such as Albert Hirshmann, Gunnar Myrdal, Raul Prebisch, and Max Singer, who sought
to understand why the theories on advantages of late comers were not applying to least
developed countries (LDCs). These authors agued that LDCs had fundamental
characteristics that had thus far prevented economic development and would continue
prevent development in the future. They argued LDCs were burdened by excess labor and
low productivity in the agricultural sector, that their economies were based on

commodities that had unfavorable terms of trade, and that system wide market failures
locked LDCs into a vicious cycle of under-development.13
The ISI model became
particularly transcendent in Latin America under the influence of Prebisch and the
Economic Commission for Latin America (ECLA) who studied the dramatic effects that
the Great Depression and the collapse of primary commodity prices had on Latin
America. Prebisch argued that in Latin America the great disparity in capabilities between
Latin American firms and international firms and the disparity between the types of
goods being traded was so great that international trade and openness only exacerbated
Latin America’s problems. Prebisch argued that the solution was for Latin American
economies to become more inward-oriented— only through restricting the entry of
foreign goods and technologies would domestic actors be forced to innovate on their
own.14
A strong, interventionist state was envisioned to protect infant industries, guide
investment, overcome persistent market failures, and generally speed up the process of
domestic economic development. The goal was for the state to develop the industries
quickest that it was most dependent on imports for, hence ‘import substitution.’ By the
late 1970s, the widespread failure of Latin America’s inward-oriented ISI modelii
and
major market distortions that the model itself had created, evidenced by widespread
balance of payments crises and the uncompetitive firms in many Latin American
countries lead to the widespread rejection of the inward-oriented ISI model.15
Neoliberals
criticized the ISI model for creating widespread market distortions through high levels of
inflation and government debts and for theorizing that the economics operated
13 Gilpin, pgs 306- 309.
14 Gilpin, pg 308;
Robert N. Gwynne, “Structural Reform in South America and Mexico: Economic and Regional
Perspectives,” in see Robert N. Gwynne and Kay Cristóbal, eds., Latin America Transformed:
Globalization and Modernity 2nd
ed., (London: Edward Arnold, 2004): pgs 43-46
15 Gilpin, pgs 309-312; Gwynne, pgs 43-46.

fundamentally differently in LDCs than in developed countries.16
In short, the inward-
oriented ISI model had created a serious predicament for many LDCs. The use of heavy
subsidies to create and heavy tariffs to then protect national industries led to the
development of highly inefficient industries. The isolation of ISI industries both removed
incentives for innovation through the absence of competitive pressures as well as
removing needed interaction with other firms that possessed more efficient technologies
and methods. The inefficiency and heavy protections of these industries both made them
expensive and unable to compete on the international market.17
Thus, ISI model’s heavy
use of protections only led to increasing the price of domestic consumption, not spurring
economic growth. Thus, even though industries had been created, many LDCs remained
highly dependent on the export of primary commodities to bring in new capital. In
essence, this led to huge new expenditure commitments by the state, but no real new way
of funding them. Indeed, much of the ISI model was funded by heavy external credit.18
When the credit became more scarce and expensive due to the Oil Shocks, and the global
economy took a down turn in the late 1970s, states that had followed the ISI model were
thrown into a balance of payments crisis as the price on their debt rose rapidly, their
internal commitments (both welfare spending and propping up slowing industries) grew
rapidly, and their ability to pay rapidly decreased.19
The neoliberal solution to balance of payments crises was simple, remove the
government distortions and ‘get the prices right.’ The seminal understanding of the
neoliberal development model is in a paper by John Williamson called the Washington
Consensus (WC).20
The three main points of the WC are for the state to embrace
16 Gilpin, pgs 309-312.
17 Paus, Foreign Investment, pgs 16-17; Moran, pgs 18-19.
18 Gwynne, pgs 45-46.
19 See Gilpin, pgs 312- 315; Gwynne, pgs 45-47; Klak, pgs 76-77; Moran pgs 7-21,
20 John Williamson, “What Washington Means by Policy Reform,” in Latin American
Adjustment: How Much Has Happened, John Williamson, ed. (Institute for International Economics, 1990).

macroeconomic discipline, embrace market principles, and maintain openness to the
international economy.21
The goal of the reforms was to remove the highly inefficient
state protections from industries, allow competition to improve productivity and reduce
prices, open up markets to allow entry of much needed foreign capital, technology, and
innovation. The role of the state was reduced to maintaining stable markets.22
Spillovers, Linkages and Development
In the neoliberal model, the opening of markets and entry of FDI was to play a
primary role in spurring economic growth and development through providing three
essential goods—technology spillovers, backwards linkages, and the establishment of an
internationally competitive industrial base.23
Technology spillovers occur whenever
transnational firms introduce cutting edge technologies, production, and management
techniques into an underdeveloped economy. Ideally, local workers who were trained in
these skills spread them throughout the country as these workers eventually moved to
other local firms and as local companies interact with the foreign firm. Backwards
linkages occur whenever local companies and entrepreneurs seek to fill sourcing needs of
the foreign firm. Backwards linkages accelerate spillovers, create domestic jobs, and can
create new exports. The theoretical goal of FDI-led development is for spillovers and
backwards linkages along with competitive pressures to transform the domestic economy
into an industrially based economy that is versed in modern technologies and business
procedures, knowledgeable of the international economy, and capable of manufacturing
Available Online. http://www.petersoninstitute.org/publications/papers/paper.cfm?ResearchID=486
21 John Williamson, “Did the Washington Consensus Fail?” (Speech at the Center for Strategic &
International Studies, Washington, DC, 6 November, 2002). Accessed Online.
http://www.iie.com/publications/papers/paper.cfm?researchid=488
22 Eva A. Paus, “Productivity Growth in Latin America: The Limits of Neoliberal Reforms,”
World Development 32 No.3 (March 2004): pg 40; Paus, Foreign Investment, pgs 11-43.
23 Moran, pgs 6- 44.

internationally competitive products through utilizing a country’s competitive
advantage.24
The neoliberal model was not supposed to produce immediate results; it was
expected that it would take countries time to adjust to market demands and to remove the
inefficient institutions and practices that the ISI model had produced.
Even though the term ‘neoliberal’ has acquired negative connotations and has
been much maligned, studies on domestic protection policies have shown that the more
liberalized a country becomes and the fewer restrictions a country places on foreign
investment entering the country, the greater the spillovers and backwards linkages are.25
Initially, the best way to achieve spillovers and linkages was thought to be to require
foreign firms to source a certain percentage of products from local firms. However, these
requirements only raised the costs of production, disqualified many countries from being
able to cater to the needs of foreign firms, and encouraged firms to recycle outdated and
obsolete technology and techniques in the host country for profit.26
Only when firms were
allowed to operate without restrictions were they able to fully integrate host countries
into their supply chain and then actually introduce the cutting edge technologies and
techniques that led to spillovers and subsequent development.27
In Moran’s overview of
findings on FDI, he finds that, inline with the neoliberal model, by opening up markets
and lowering barriers, not only does investment increase, but also efficiency and
innovation increase.28
Furthermore, foreign firms that invest in LDCs, even without
guaranteed wages and labor conditions, regularly provide higher wages and better
working conditions than the domestic firms do.29
Thus, despite many of the critiques of
24 Moran, pgs 1-3, 6-74 ; Paus and Gallagher, pgs 56-61; Mytelka and Barclay pg 535; Paus,
Foreign Investment, pgs11-49.
25 Moran, pgs 6-27
26 Moran, pgs 7-9
27 Moran, pgs 10-15.
28 See Moran, pgs 6-43.
29 Moran, pgs 45- 74

neoliberal reforms and the painful experience that many countries had engaging in
structural reform, the neoliberal model’s main strength is pointing out that development
can not occur if basic economic principles are ignored.
The other major source of FDI-led development theories are theories about
globalization. For the purposes of this paper, the most important aspect of theories about
globalization is the argument that firms are becoming continually less national. Originally
theorized by Michael Porter, who argued that due to increased advances in
communication and transportation, it is becoming increasingly viable and necessary for
transnational firms to fragment their production chains across national lines and to take
advantage of cheaper labor, strategic location, unique skill sets, and any other advantages
a foreign location may offer. In order for a firm to remain competitive, it must maximize
its efficiency on a global scale.30
Thus, as firms becoming increasingly multinational,
more FDI is available to spur the kinds of economic development described above.
Another aspect of globalization that has major implications on theories of FDI-led
development are theories that deal with the changing source of value in the global
economy. Robert Reich argues that the global economy has shifted from one where value
was primarily based in the volume of production to an economy where value is primarily
determined by innovation and knowledge. Reich argues that most of the growth in the last
quarter of the century has not been in firms that produce more products, but more niche,
specialized products that can produce higher profits.31
Now, just increasing industrial
production isn’t enough to spur development, since the increases in technology,
communication, and transportation that have come with globalization have also eroded
the profits that can be made from assembly productions through greatly increasing
30 Gilpin, pgs 285-286. Also discussed in Paus, Foreign Investment, pgs 1-6, 13-43
31 Robert Reich. The Work of Nations: Preparing Ourselves for 21st
Century Capitalism. (New
York: A.A. Knoff, 1991)

efficiency. According to this line of reasoning, all types of FDI are not equal. Different
industries produce different amounts of value-added, the fastest way for FDI to spur
economic growth is for it to occur in higher value production.32
Therefore, a country that
attracts FDI from a high value-added computer company is going to be far more
benefited than a country that can only attract textile assembly operations.
FDI, Stability, and Strategy
This brings us to actual theories of FDI-led development. According to neoliberal
and globalization theories, the combination of globalizing, transnational firms and under-
developed countries with location specific assets who follow sound macroeconomic
policy should provide the perfect circumstances for increased development. Theories of
FDI-led development are predominantly domestic, comparative theories, seeking to find
which domestic policies attract the most investments, the highest value investments, and
produce the greatest spillover and linkage effects. However, it should be noted that most
FDI-led theories are not purely neoliberal. In a purely neoliberal model, the state’s only
role is to provide macroeconomic stability. FDI-led theories acknowledge that
information asymmetries exist between under-developed countries and potential
investors.33
Some authors contend that the state plays a central role in overcoming those
asymmetries while others view private actors as the most suited. For example, on end of
the spectrum, Mary Clark argues that the state’s primary role is to provide
macroeconomic stability and appropriately oriented tax incentives. She argues that a
‘transnational alliance’ of private actors is best suited to overcome the informational
asymmetries between firms since they are best able to avoid costly political
entanglements and divisions. Others, such as Mytelka and Barclay and Paus argue that a
32 Paus, Foreign Investment, pgs 12-23
33 Moran, pgs 29-30
Clark, Transnational Alliances, pgs 71-94.

state itself should go as far choosing investment opportunities and lobbying potential
investors.34
However, in essence FDI-led development theories remain neoliberal because
the main actors responsible for producing economic development and nation-wide
structural change are still private, while the state plays, at most, a coordinating and
planning role.
Different authors emphasize different aspects of FDI attraction strategies as key.
For example, Timothy Moran argues that a successful attraction strategy requires four key
aspects-- a stable investment climate, the overcoming of information imperfections,
calming investor anxiety, and providing investment incentives.35
Roy Nelson argues that
the autonomy of a country’s leaders from special interests and the possession of an
ideological consensus among political elites are the key aspects of a beneficial investment
climate. Second, he argues that a government must possess transnational learning
capabilities, which requires governments to learn about prospective investors and the
potential benefits the country offers to the transnational firm and the firm to the country.
A country with transnational learning capacity must then be able to be responsive to the
needs of potential investors and engage in a sustained effort of attraction.36
Similarly, Eva
Paus and Kevin Gallagher argue that an FDI policy must seek to maximize linkages and
spillovers, which is achieved by matching a country’s specific spillover potentials with
the global strategy of transnational corporations.37
Finally, Lynn Mytelka and Lou
Barclay argue that a country must develop a ‘system of innovation’ to be able to
continually compete for FDI. They define a ‘system of innovation’ as a “network of
economic agents, together with the institutions and policies that influence their innovative
34 See Mytelka and Barclay, pgs 534-536; Paus and Gallagher, pgs 55-60.
35 Moran, pgs 27-31
36 Nelson, pgs 3-28.
37 Paus and Gallagher, pgs 53-65.

behavior and performance.” They argue that domestic policies play a central role in
determining the behavior of economic actors. Therefore, simply acquiring FDI is not
enough to spur development if domestic policies encourage the wrong kinds of behavior.
FDI will only lead to development if policies encourage the right domestic and
international actors to interact. Mytelka and Barclay argue further that the state must
monitor those interactions and make sure that they are guided in beneficial direction with
the right information reaching the right actors. Thus, Mytelka and Barclay argue a
government must have a long-term, big picture, dynamic view of how FDI will be used to
stimulate growth.38
For the purposes of this paper, all of these different terms can be simplified into
two key components. First, a country must have political and macroeconomic stability.
This can be derived from Moran’s need for a stable investment climate and Nelson’s need
for the political leaders’ autonomy from special interests and ideological consensus. The
key characteristics that the literature has focused on that bring stability are low inflation,
favorable exchange rates, low crime, low corruption, reliable and transparent regulatory
framework, stable property rights, and reliable transportation and communication
infrastructure.39
Transnational firms are much less likely to invest in an LDC, as opposed
to an OECD country, unless they can expect the same rule of law and basic stability that
those countries offer. Furthermore, with regard to autonomy, Nelson argues that
governments can make much better decisions about which investments to target if a
country’s leaders are not involved in rent-seeking behavior.40
Then, with regard to
ideological consensus, businesses are much less likely to invest in countries if an election
38 Mytelka and Barclay, 531-539.
39 Moran, pgs 21-22; Paus, Foreign Investment, pgs 17-18;
40 Nelson, pg 5, 8-11

holds the possibility of markedly altering their relationship with the government of the
country.41
The second core component is that a country must engage in a long-term strategy
of attracting and utilizing investment. This can be derived from Moran’s need for a
country to overcome information imperfections, calm investors’ concerns, and provide
incentives; Nelson’s need for transnational learning capacity; Mytelka’s system of
innovation; and, finally, Paus and Gallagher’s concept of spillover maximization. It is not
enough for a country to just remove trade barriers, it must judiciously pursue investment
that will generate long-term and beneficial growth and provide necessary incentives to
attract investors. The reasoning is as follows: FDI strategies are based on developing non-
traditional exports in under-developed countries. However, these countries will have few
competitive advantages outside of tax benefits, cheap labor, and location. Therefore, most
countries will begin with low-tech, low-skill, low return assembly operations. In order for
a state to avoid being relegated to cheap labor, low-return operations, the state (or an
investment promotion organization) needs a long-term plan that will attract the highest
value, most appropriate investment (i.e., most conducive to long-term, stable growth),
maximize spillover and linkage potentials (which are the crux of the FDI model), and
continually invest in upgrading skills and infrastructures to keep upgrading the
investment potential of a country.42
Therefore, it is not enough to just have a stable
macroeconomic environment, or just possess location or skill specific assets that would
be beneficial to a transnational firm’s productivity.
41Nelson, pgs 6, 8-11
42 See Jose Cordero and Eva Paus, Discussion Paper Number 13- Foreign Investment and
Economic Development in Costa Rica: Unrealized Potential. (Medford, MA: Working Group on
Development and Environment in the Americas, 2008):, pgs 15-23;
Paus and Gallagher, pgs 54-56; Paus, Foreign Investment, pgs 11-43; Mytelka and Barclay, pgs
535-539.

The common proposed solution for this long-term strategy is the creation of an
investment promotion agency (IPA). FDI-led growth theories acknowledge that
information asymmetry and information costs pose real obstacles to ideal market
operation and FDI development. Investment promotion agencies are theorized to be able
to not only help coordinate a long-term strategy, but also help both LDCs and
transnational firms overcome information asymmetries. Investment promotion agencies
are tasked with researching investment opportunities, marketing the country abroad,
directly lobbying potential investors, assisting domestic producers connect with
international investors, training domestic actors, and lobbying the government on future
policy recommendations.43
An IPA’s job is highly specialized and requires highly skilled
technocrats and bureaucrats who not only design an appropriate strategy, but also
successfully lobby and persuade investors.44
To summarize, the initial neoliberal models argued that LDCs only way to
develop was to pursue sound economic policies and remove gross market distortions.
Theories of globalization then argued that transnational firms offered an ideal source of
needed capital and technology to spur development in LDCs. Finally, FDI-led
development theories argued that countries needed to follow two core, stability and long-
term strategy, goals in order to attract the necessary FDI and to utilize it for development.
As we will see in the next section, Costa Rica experienced first hand the failures of the
ISI model and thrived from FDI after structural adjustment, thus providing an ideal case
to analyze the validity of these theories.
The Costa Rican Case
Background
43 Morrissett and Andrews, pgs 32-44
44 Moran, pg 29; Morrissett and Andrews, pgs 51-52.

Costa Rica shares many of the historical traits and pitfalls as many other Latin
American countries, yet it also possesses unique characteristics that have allowed it to
enjoy greater levels of political and economic stability. Like the rest of Latin America, it
was part of the Spanish Empire and its initial economy was designed around mono-crop
exports.45
Initially, Costa Rica served as a producer of cocoa for the other Spanish
colonies. Later, it switched to producing tobacco. Finally, in 1830, coffee and bananas
became its primary exports. This economic legacy remained largely unchanged through
the twentieth century, with the only United States replacing Spain as the primary
destination of its exports.46
However, unlike many other Latin American nations, Costa Rica avoided some of
the other, more vicious aspects of colonization. First of all, Costa Rica did not contain a
large indigenous population. It was situated on the outskirts of the Mayan and Olmec
civilizations, and was largely just a trading zone with no dominant group to enslave.47
Secondly, it lacked abundant extractable resources. These two factors allowed Costa
Rica to avoid many of the most destructive dynamics of racial subjugation and
environmental exploitation that many other Spanish colonies suffered.48
Most notably,
Costa Rica did not develop a plantation-based economy, but instead developed a more
egalitarian farming tradition, avoiding widespread inequalities in land and income
distribution.49
This has allowed Costa Rica to have one of the smaller disparities between
45 Klak, pg 73.
46 Cordero and Paus, pg 2.
47 Frederick Wherry, “Trading Impressions: Evidence from Costa Rica.” The ANNALS of the
American Academy of Political and Social Science 610 (March 2007): pgs221-223
48 See Jorge Larraín, “Modernity and Identity: Cultural Change in Latin America,” in Latin
America Transformed: Globalization and Modernity 2nd
ed., eds. Robert N. Gwynne and Kay Cristóbal, (London:
Edward Arnold, 2004): pgs 24-25
49 Gary S. Fields, “Employment and Economic Growth in Costa Rica,” World Development 16
No.12 (1988): pg 1494

the rich and poor in Latin America.50
Only Uruguay and Bolivia have lower GINI
coefficients.51
Another unique aspect of Costa Rica is its relatively high levels of investment in
public goods. After the 1948 civil war, Costa Rica abolished its army, which allowed it to
spend considerably more on social goals, such as education, health care, and
infrastructure.52
For example, from 1958 to 2001, compared to the Dominican Republic,
Costa Rica regularly spent two to four times as much, as a percentage of GDP, on public
social spending, health care, and education.53
Also, Costa Rica ranks 43 on the Human
Development Index, which is quite high for a country of its size.rd
Comparatively, the
worst HDI scores the region are in Haiti and Guatemala, at 146 and 120thth
respectively
and the highest in score in the region is 31st
in Barbados.54
Costa Rica has enjoyed
undisturbed democratic rule since 1948, has a strong tradition of the rule of law and
transparent legal structures, and a well-trained professional bureaucracy.55
This unique
Latin American experience contributed to Costa Rica having a much more peaceful
history than many of its neighbors, more stable political institutions, fewer ethnic
tensions, fewer class tensions, a better educated populace, better infrastructure, and a
much more positive image for foreign investors and politicians.iii
Finally, Costa Rica also sits in a strategically advantageous position. It lies close
to the US, has access to both the Pacific and Atlantic oceans. Thus, products can get to
50 Wherry, pgs 221-222
51 Kelly Hoffman and Miguel Angel Centeno. “The Lopsided Continent: Inequality in Latin
America.” The Annual Review of Sociology 29 (2003): pg 366.
52 Paus and Cordero, pg 2; Lynn K. Mytelka and Lou Anne Barclay, “Using Foreign Investment
Strategically for Innovation.” European Journal of Development Research 16 No.3 (Autumn 2004): pg
548.
53 Diego Sanchez-Ancochea, “Development Trajectories and New Comparative Advantages:
Costa Rica and the Dominican Republic Under Globalization.” World Development 34 No. 6 (2006): pg
997-999.
rd Klak, pgs 70-71.
54 Klak, pgs 70-71
55 Spar, pg 137.

the US from Costa Rica within hours by the air, and Costa Rica can easily ship products
to both Europe and Asia with ease.56
However, even given Costa Rica’s unique heritage, it has not been immune to
many of the macroeconomic dynamics that have plagued Latin America. Despite the fact
Costa Rica has a notably peaceful history for the region, Costa Rica remained
economically undeveloped and largely agricultural until the mid-1980s. For example, in
1960 63% of its labor force lived in rural areas while 50% of the labor force was engaged
in agriculture, as opposed to 11% in manufacturing, 10% in commerce and 17% in
services. Agriculture accounted for the largest sector of Costa Rica’s GDP at 26%, and
Costa Rica had a GNP of only $336 per capita. 57
Thus, Costa Rica was by no means
wealthier than the rest of the region.
Following World War II, Costa Rica embarked on an extensive Import
Substitution Industrialization (ISI) program similar to the rest of Latin America.58
Costa
Rica witnessed relatively strong economic growth, 6.5% annually, in the 1960s and early
1970s.59
Its ISI program, while still inwardly oriented, was regionally based. Costa Rica,
along with the other Central American countries created the Central American Common
Market (CACM). In the CACM, all the states created national industries though heavy
subsidies and protections. However, they then traded their industrial products freely with
each other. The only major exports, and consequently the only source of funding for their
ISI program, outside of the CACM remained primarily coffee and bananas. So even
though manufacturing had risen from 4% of Costa Rica’s exports to 29% by the late
1970s, 80% of those products were going to other CACM countries.60
This provided a
56 Paus, Foreign Investment, pg 160.
57 Fields, pg. 1494
58 For a more in depth look at Costa Rica’s ISI strategy, see Fields, for a broad over view of the
general ISI model adopted in Latin America, see Klak.
59 Paus, Foreign Investment, 137
60 Fields, pg 1494.

slightly larger market for Costa Rican industrial exports, but still a considerably small
one. This situation essentially amounted to a few small economies trading their
overpriced goods between each other without collecting the tariffs which were necessary
to finance the industry protections necessary for the industry to even operate. All the
while, the increased trade did nothing to change Costa Rica’s primary source of capital:
bananas and coffee.61
The combination of growing government spending, a ballooning foreign debt, and
a collapse in the prices of coffee and bananas led Costa Rica into a dire balance of
payments crisis in 1980.62
Coffee prices had seen a 45% drop. At the same time, their
foreign debt had increased 14-fold in the past decade. These two factors were
compounded by sky-rocketing interest rates on that debt and little currency reserves,
which left Costa Rica in a crisis of quickly decreasing income and quickly increasing
obligations. Costa Rica’s currency was also highly over valued, which exaggerated these
problems. Once the value of Colon was adjusted, its value compared to the US dollar
quickly dropped from 9:1 to 65:1. Furthermore, major political upheaval sent many of
Costa Rica’s CACM trading partners into disarray.63
By 1981, Costa Rica was forced to
put a moratorium on its international debt, inflation reached 90%, industrial production
dropped 44%, Gross Domestic Product (GDP) dropped by 9%, and unemployment more
than doubled from 4.6% to 9.5%.64
Neoliberal Reforms and Growth
By 1982, Costa Rica had hit rock bottom and needed to engage in a major
structural reform program. Costa Rica was facing a nearly identical situation as the rest of
61 Fields, pg 1494.
62 Paus, Foreign Investment, pg 138; Fields, pgs 1497-1498; Gwynne and Kay, pg 16-18.
63 Fields, pgs 1497-1498.
64 Fields pgs 1498-1501

Latin America – skyrocketing debts, collapsed commodity prices, and uncompetitive
industries.65
Costa Rica and the rest of Latin America implemented a similar set of
reforms – the Washington Consensus. According to Morley, Machado, and Pettinato,
Costa Rica scored a .848 on the Washington Consensus reform index. The average Latin
American country scored a .821. In Costa Rica, the reform process began in 1982 with
the start of the Monge administration. Costa Rica’s reforms included three main
components—reduce trade barriers, reduce the size of the state, and encourage FDI.
In order to achieve the first two goals, Costa Rica lowered its tariffs from an
average of 60% in 1982 to an average of 5.8% by 2004. The next step was to reduce of
the size of the state. By the early 1990s, most state firms had been privatized, and in the
1990s, Costa Rica also downsized its civil service ranks and reduced its public
employment.66
The primary goal for drastically reducing the size and the commitments of
the state are to aid in macroeconomic stability. As the ISI experiment showed, persistent
debt and inflation caused by an over-extended state is disastrous. Since downsizing the
Costa Rican state, Costa Rica has been able to keep inflation under 10% and keep debts
under 3% of the GDP.67
Finally, since the early 1980s, Costa Rica has seen a strong and steady increase in
the amount of FDI entering the country. The main tools used to pursue this goal have
been the use of free zonesiv
and the creation of an investment promotion agency to attract
investors. Free zones are designated areas where foreign corporations are initially exempt
from income taxes and are allowed to freely move products and capital in and out of the
country. In Costa Rica, free zones were responsible for the creation of 39,000 jobs. In
65 See Robert N. Gwynne and Kay Cristóbal, eds., Latin America Transformed: Globalization
and Modernity 2nd
ed., (London: Edward Arnold, 2004), Chapters 1-4.
Quoted in Paus, Foreign Investment, pg 140.
66 Paus, Foreign Investment, pgs 136-142
67 Mirchandani and Condo, pg 338.

fact, employment in free zones doubled between 1997 and 2003, and free zones, on
average, provide wages 20% higher than non free zone jobs in similar sectors.
Furthermore, free zones have seen employment grow fastest in the highest skilled jobs
(see Table 2).
Table - Employment in Free Zones by Sector
1997 1998 1999 2000 2001 2002 2003 2004 2005
Machinery, electronic
materials, and
components
2,625 6,837 7,319 9,729 9,637 9,096 8,034 10,643 9,081
Services 3,654 4,186 1,320 1,372 2,631 3,922 5,463 6,985 8,577
Textile, design, leather
& shoe
8,296 9,887 11,331 9,086 12,211 11,963 9,718 7,689 7,517
Precision instruments
& medical equipment
135 212 1,576 2,101 2,678 3,512 4,063 2,371 5,113
Agroindustry 454 683 1,072 1,841 2,459 2,512 2,632 2,982 3,171
Plastic, rubber & their
manufacture
65 223 967 1,009 887 977 1,003 1,568 1,593
Metal manufactures 22 397 416 363 755 384 650 740 893
Chemical &
pharmaceutical
products
102 113 137 129 148 94 87 114 136
Agriculture & cattle 0 3 20 45 467 509 698 749 776
Others 1,324 1,745 2,203 2,515 2,211 2,085 1,956 1,772 2,152
Source: Cordero and Paus, pg 15. Data originally provided by PROCOMER. Emphasis added.
Free zone production was responsible for an annual average of $3.27 billion in
US$ between 2001 and 2006. Exports from free zone exports grew 81.2% between 2001
and 2006, from a gross total of $2.31 billion to $4.31 billion. Within the free zones during
2001 to 2006, from 66% to 72% of exports were in the high value sectors electronics,
precision instruments, and pharmaceutical industries, while the rest of exports (listed
from greatest to least by percentage) were textiles, services, agroindustries,
plastics, metals, and livestock (See Table 3).68
As expected by FDI-led-growth theories,
free zones were instrumental introducing industries that led to higher wages, higher value
exports, and increased economic growth. In fact, Costa Rica has the amount high-tech
production when measured by percentage of GDP in Latin America.69
68 Paus and Cordero, pgs 9-18.
69 Derek Hill, “Latin America: High-Tech Manufacturing on the Rise, but Outpaced by East
Asia.” InfoBrief (August 2002): pg 3.

Table - Exports in Millions of U.S. $ in Costa Rica’s Free Zones
2001 2002 2003 2004 2005 2006
Machinery,
electrical
materials &
components
1218 1256 1789 1560 1878 2305
Precision
instruments &
medical
equipment
330 412 529 541 585 676
Agroindustry 97 204 246 307 336 337
Textiles, clothing,
leather, and
shoes
404 425 347 334 328 306
Services 106 128 143 147 172 222
Plastic, rubber &
their manufactures
67 81 93 139 163 189
Chemical and
pharmaceutical
products
40 39 51 68 68 67
Metal products 33 30 34 48 57 76
Agriculture and
livestock
18 21 27 25 23 20
TOTAL 2381 2665 3327 3242 3699 4314
Source: Cordero and Paus, pgs 10-11. Data originally provided by PROCOMER.
Emphasis added.
One of the most important aspects of FDI attraction in Costa Rica is the
Coalición Costarricense de Iniciativas para el Desarrollo (CINDE), which is an extra-
governmental agency comprised by Costa Rican business men and external advisors who
make policy suggestions to the Costa Rican government, lobby foreign companies to
invest in Costa Rica, and provide find investment opportunities.70
CINDE’s role in the
planning of Costa Rica’s long-term strategy cannot be understated. CINDE was not only
primarily responsible from overcoming informational asymmetries between Costa Rica
and investors,71
it was also primarily responsible for designing Costa Rica’s electronics-
focused development plan.72
Due to lobbying performed by CINDE, Costa Rica has been
able to attract investment from such major firms as Intel, Baxter Healthcare, Abbott
Laboratories, Sensor Scientific, Motorola, Maersk Sealand, and others.73
Source: The World Bank Group/ Multilateral Investment Agency, pg 13.
70 Clark, Transnational Alliances, pg 80
71 Nelson, pgs 11-12; Paus, Foreign Investment, pgs 165-172; Spar, pgs 15-16;
72 Cordero and Paus, pg 7
73 Nelson, pgs 13-14; Paus, Foreign Investment, pgs 165-168; Spar, pg 16;

Source: The World Bank Group/ Multilateral Investment Guarantee Agency
Table - Foreign Direct Investment
by Year in Constant $US Millions
Table - Composition of Costa Rican
Exports in 1985 and 2003
The most significant effects
of Costa Rica’s reform program
has been sharp increase in FDI
that began flowing to Costa
Rica in the 1980s and has
continued since then (See Table 4). Whereas in
the 1970s the country saw on average $ 44
million in FDI per year, the 1980s saw that
average rise to $70 million, the 1990s saw that average jump to $352 million per year,
and by the year 2002, Costa Rica saw $662 million in FDI enter the country. More
importantly, however, is that the majority of these FDI inflows were neither speculative
hot money, nor largely due to the privatization of industries. Much of the FDI flowing
into Costa Rica was concentrated in the industrial export sector (See Table 6). Under this
huge boom in investment, Costa Rica has been able to transition from a primarily
agricultural exporter to an exporter primarily in non-traditional exports and high-tech
exports (see Table 5). For example, between 1982 and 1992 coffee fell from 30% of
exports to 10%, bananas remained around 20-24% of exports, but non-traditional exports
rose from around 5% of GDP to 40%. This trend continued throughout the 1990s and
between 1997 and 2003, from 49% to 73% of FDI each year occurred in the industrial
sector. During this period, Costa Rica saw non-traditional exports came to further
The World Bank Group/ Multilateral Investment Guarantee Agency. The Impact of Intel in Costa Rica:
Nine Years After the Decision to Invest. (Washington D.C.: The World Bank, 2006): pgs 8-12.

dominate its export portfolio. The two primary exports, coffee and bananas, fell to a
combined 12.3% of exports by 2003. At the same time, although domestic industrial
exports fell from 27.3% to 17.3%, industrial and manufacturing exports from FDI
industries rose from 21.6% of exports to a staggering 60.5% of exports.74
Whereas in
1985 only 3.5% of exports were in high technology intensive sectors and 75% were in
primary commodities, by the year 2000, 34.3% of Costa Rica’s exports were in high
technology intensive sectors, while low technology industrial products were an additional
17.1% of exports and primary products and resource exports had fallen to 37.6%.75
Additionally, as of 2002, Costa Rica has the highest rate of research and development
spending in Latin America, which suggests that it will be able to continue attracting high
technology investment.76
Table - FDI Inflows by Sector in Millions of Constant US Dollars and Percentages
Sectors: Agricultural Industry Commerce Other Total
Total % Share Total % Share Total % Share Total % Share Total
1990 89.9 55.05 % 48.8 29.88 % -0.5 0.31 % 25.1 15.37 % 163.3
1991 108.4 61.76 % 32 17.94 % 9.6 5.38 % 28.4 15.92 % 178.4
1992 113.8 50.35 % 51.9 22.96 % 5.8 2.57 % 54.5 24.12 % 226
1993 81.9 33.20 % 98.3 39.85 % 12.4 5.03 % 54.1 21.93 % 246.7
1994 42.7 14.35 % 167.7 56.42 % 48.5 16.30 % 38.5 12.94 % 297.6
1995 48.4 14.37 % 186.3 55.30 % 21.2 6.29 % 81 24.04 % 336.9
1996 34.6 8.10 % 257.4 60.30 % 35.5 8.32 % 99.4 23.28 % 426.9
1997 38.1 9.36 % 270.6 66.50 % 17.6 4.33 % 80.6 19.81 % 406.9
1998 41.9 6.85 % 423.5 69.24 % 39.3 6.43 % 106.9 17.48 % 611.6
1999 49.9 8.05 % 355.9 57.54 % 9.2 1.49 % 204.5 33.01 % 619.5
2000 -11.2 -2.74 % 296.2 72.49 % 17.4 4.26 % 106.2 25.99 % 408.6
2001 1 0.22 % 231.4 51.01 % 8.3 1.83 % 212.9 46.94 % 453.6
74 All of these figures are originally from the World Bank, UNCTAD, and the Central Bank of
Costa Rica, I obtained them from Paus, Foreign Investment, Paus and Cordero, and
Mary A. Clark, “Nontraditional Export Promotion in Costa Rica: Sustaining Export-Led Growth.” Journal
of Interamerican Studies and World Affairs 37 No.2 (Summer, 1995): 181-223.
75 Paus, Foreign Investment, pg 152
76 Hill, pg 3

2002 -8.6 -1.30 % 482.7 72.93 % 15.2 2.30 % 172.6 26.08 % 661.9
2003 -29.8 -5.08 % 356.5 60.74 % 0.5 0.09 % 259.7 44.25 % 586.9
Source: Mirchandani and Condo, pg 355.
Costa Rica’s Intel Plant
The most recognizable mark of achievement by Costa Rica was the choice in
1996 by the Intel Corporation to build a $300 million semiconductor assembly plant in
Costa Rica. The Costa Rican Intel plant has been an exhaustively studied phenomenon,
and it serves as an excellent anecdotal case for examining the success of Costa Rica’s
reform program and the FDI model itself.77
The main reason that the Intel plant attracted
so much attention was that Costa Rica was never viewed as a serious candidate until the
decision to invest there was announced.78
Intel built a 52 hectare-plant, which employs
around 2900 employees directly, with thousands of other indirectly created jobs. Intel has
continued to expand and invest further in the plant. The Costa Rican plant, by 2003,
assembled 22-25% of Intel’s total sales. Intel is estimated to have generated between $90-
200 million per year for Costa Rica’s economy.79
One of the most important aspects of Costa Rica’s attraction of Intel was the
signaling affect afterwards.80
After the signaling effect,’ Proctor and Gamble and Abbott
laboratories, who had also been considering investing in Costa Rica, were swayed to
invest.81
Just within the first two years of Intel’s presence, they attracted an additional ten
electronics companies to invest in Costa Rica.82
Furthermore, since the establishment of
the Intel plant, Costa Rica has seen concrete backwards linkages and spillovers occur. For
example, Intel’s list of local suppliers quickly grew to over 200 in the first two years.
77 See Spar, and The World Bank Group.
78 Spar, pg 8.
79The World Bank Group/ Multilateral Investment Agency, pgs 7-17.
80 World Bank Group/Multilateral Investment Agency, pg 9.
81 The World Bank Group/Multilateral Investment Agency, pg s 9-10.
82 Mytelka and Baclay, pg 551

Furthermore, 63 different domestic firms provide essential electronics inputs. Even more
encouraging is the fact that Costa Rican companies that have arisen to provide sourcing
needs for Intel have expanded their clients and capabilities to be able to serve the other
electronics companies in Costa Rica, which will facilitate further electronics
investment.83
Technology and management technique spillovers have also occurred. Studies
have found that up to 35% of the domestic supplier firms received their training at Intel,
with 80% of that training occurring at Intel’s facilities, giving those employees access to
and experience in a world-class facility. Furthermore, around 18% of Intel’s suppliers
reported that they had altered business and production practices solely due to their
interaction with Intel.84
However, what is more instructive for the purposes of this paper is understanding
how Intel came to their decision to invest in Costa Rica. According to Intel executives,
Costa Rica’s stability and their long term investment strategy were the deciding factors in
their investment decision. The stability factors that convinced them to invest were their
confidence in Costa Rica’s future stability, their commitment to economic openness, and
the pro-foreign investment climate. Specifically, they noted Costa Rica’s long-standing
democratic governance, the ideological coherence and popular support for FDI-led
development and attraction that both the political elites and Costa Rican electorate
possessed, the transparent and reliable legal structure, and educated, competent civil
service were the explicit factors that Intel executives listed as their basis for trusting in
Costa Rica’s future stability.85
Furthermore, Costa Rican officials restrained from offering
bribes or other backdoor deals, which further spoke to Costa Rica’s stable and reliable
83 Mytelka and Barclay, pgs 551-552.
84 Mytelka and Barclay, pgs 551-552.
85 Spar, pgs 12-18.

business climate.86
Costa Rica’s long-term investment strategy was also decisive in Intel’s
decision to invest. According to executives, they were particularly impressed by Costa
Rica’s singular focus on attracting investment in and fostering of the electronics sector.
Not only did Costa Rica possess a highly educated and bilingual population, it also
implemented technology classes in high schools and colleges to raise the technology skill
levels of its population. The programs were even geared to cater to industries as specific
as microprocessors.87
Another key aspect of Costa Rica’s strategy was the active role played by high-
level bureaucrats and politicians. Even President Jose Figueres would sit in on meetings
and offer his assurances of the concessions and agreements. Indeed the Costa Rican
negotiating team ensured Intel that they were all on the same page. This allowed the
Costa Ricans to respond to Intel’s concerns in a rapid and reassuring manner.88
The third key aspect of the attraction strategy that convinced Intel was that Costa
Rica was willing to make the necessary policy concessions to cater to Intel’s needs. Even
beyond Costa Rica’s free zone policy, Intel was worried over uncertainty in certain
provisions in the tax code. Costa Rica’s Attorney General offered a thorough policy
review and ruling, assuring Intel that they would not be affected by additional taxes.
Then, Costa Rica’s transportation department guaranteed that they would improve road
and airport infrastructure to meet Intel’s needs. Costa Rica also committed to building the
Intel factory’s own dedicated power plant and offered Intel a discounted rate on
electricity.89
Thus, as we can see Costa Rica’s attraction of Intel involved much more than
just lowering trade barriers. Even beyond free zone benefits, considerable investments in
86 Spar, pgs 12-18.
87 Spar, pg 14
88 Spar, pgs 15-19, Nelson, pgs 11-13. .
89 Spar, pgs 15-19.

education, training programs, and construction of Intel specific infrastructure were all
required to persuade Intel to invest in Costa Rica.
However, the most important factor in attracting Intel’s investment was the
aggressive lobbying and coordination performed by CINDE.90
Once CINDE decided to
focus on attracting electronics investment, it began researching opportunities. CINDE
both made the initial contact with Intel and facilitated the interactions and negotiations
between Intel and Costa Ricans. Indeed, CINDE provided the “one-stop shop” for Intel’s
Costa Rican concerns and needs. More importantly, CINDE designed and promoted an
aggressive campaign to counter Intel’s concerns over Costa Rica’s size. For example,
Intel had concerns over labor laws. CINDE contacted Costa Rica’s Minister of Labor,
researched all the relevant labor laws, and then provided an extensive explanation which
assuaged Intel’s concerns. CINDE’s direct control over this process prevented lengthy
and costly attempts by Intel officials to try and navigate Costa Rica’s bureaucracy or
research the answer themselves. Furthermore, by CINDE’s control of this process, they
prevented miscommunication and confusion between Intel and Costa Rica.91
CINDE was
also highly active in domestic lobbying efforts. They organized an aggressive domestic
campaign by distributing strategic memos to key political players and even engaging in a
media campaign to prevent fears of potential exploitation.92
As we can see, there was
considerable information asymmetry between Costa Rica and Intel. Not only was Intel
initially not aware of Costa Rica’s potential benefits, there were also countless hurdles in
communication and information along the way. CINDE’s competent and expedient
90 Spar, pgs 15-18.
91 Spar, pg 16.
92 Spar, pgs 15-16.

handling of these informational issues proved to be decisive attracting Intel to Costa
Rica93
Thus, in the interaction between Costa Rica and Intel we can see that Costa Rica’s
stability and long-term strategy were certainly key components in attracting FDI that lead
to beneficial spillovers and feedbacks. However, we also see that considerable
investments were required and considerable information asymmetries existed, which
CINDE was central in overcoming.
A Closer Look at Costa Rica’s Success
A cursory glance of both Costa Rica’s macroeconomic growth and its
microeconomic interaction with Intel strongly conforms to the expectations of the FDI-
led growth models. The combination of Costa Rica’s historical stability, once combined
with sound macroeconomic management allowed Costa Rica to attract high quantities of
FDI, which have seen Costa Rica move rather rapidly from a largely agricultural country
to a country with a dynamic electronics sector. However, a major part of the story has not
been told. External actors, namely the United States Agency for International
Development (USAID), played a key role in ensuring Costa Rica’s stability, and in
planning and funding its long-term strategy. USAID played a major role in providing the
monetary resources necessary to maintain stability and the informational resources
needed to plan and implement a long-term strategy. The combination of a long-term plan
and resources then allowed Costa Rica, through CINDE, to overcome informational
asymmetries and attract FDI.
Stability
Costa Rica’s long-term investments and notable stability have greatly improved
its investment potential and many aspects of its political stability are largely due to
93 Spar, pg 16.

endogenous factors. However, as noted earlier, the early 1980s was also a rather dire
time in Costa Rica’s history as well as for the rest of Central America. During the 1980’s
liberalization reforms and structural adjustment program, the United States played a
decisive role in ensuring Costa Rica’s continued macroeconomic stability. The United
States accomplished this through two main tools: direct aid money, which protected
Costa Rica from the most jarring aspects of structural adjustment, and ensuring Costa
Rica had a stable export market and continued steady investment.
As Nicaragua, El Salvador and Guatemala became engulfed in civil wars,
Costa Rica became central to the Reagan Administration’s anti-communist policies in the
hemisphere. In the words of the USAID director Daniel Chaij (1982-1987), Costa Rica
was to be the “beacon of democracy” in Central America. Between 1982 and 1990, Costa
Rica received $1.34 billion in US aid, which averaged out annually to 3.15% of Costa
Rica’s GDP during that time (See Table 7). At its peak in 1985, Costa Rica received $220
million, which was equivalent to 5% of Costa Rica’s GDP. Costa Rica used this huge
inflow of funds to pursue economic stabilization and to alleviate its balance of payments
crisis. This aid money allowed Costa Rica to exit the crisis of the
Table - U.S. Aid to Costa Rica,
1980-2001
Year Millions of
current US$
Percentage of
Costa Rica’s
GDP
1980 15.9 0.6
1981 15.2 0.6
1982 51.8 1.6
1983 214.1 5.8
1984 169.8 4.3
1985 220.1 5.0
1986 162.7 3.6
1987 181.2 3.9
1988 120.3 2.3
1989 121.9 2.1
1990 95.3 1.3
Paus,Foreign Investment, pgs140-143; Clark, Transnational Alliances, pg 79

1991 44.9 0.5
1992 26.7 0.3
1993 27.6 0.3
1994 12.1 0.1
1995 6.2 0.1
1996 2.1 0.0
1997 0.1 0.0
1998 0.7 0.0
1999 1.1 0.0
2000 0.5 0.0
2001 0.5 0.0
Source: Paus, Foreign Investment, pg
141. Originally from USAID.
early 1980s much sooner than most other Latin American countries, and to avoid the high
social costs that other Latin American countries experienced during their periods of crisis
and structural readjustment.94
Furthermore, Costa Rica received enough aid from the US that it was able to
avoid the extensive involvement from the World Bank and International Monetary Fund,
whose policies have been largely
associated with some of the more jarring and negative aspects of structural adjustment
programs that many other Latin American countries engaged in.95
Since the bulk of Costa
Rica’s money was not coming from those institutions, it was able to avoid the
implementation of more severe shock therapy programs that they advocated.v
For
example, instead of having to immediately open its financial sector, USAID allowed
Costa Rica to gradually liberalize, and not fully open up its domestic financial market
until 1992. Also during this time a considerable amount of US aid went into building up
Costa Rica’s domestic banking sector. Specifically, USAID gave the Costa Rican bank
BANEX a $10 million loan so that it could keep Costa Rican industries afloat, keep
coffee farmers exporting, and serve as a base for international exchange. With a better-
94 Paus, Foreign Investment, pg 142
95 Klak, pg 77

supported financial sector, Costa Rica was equipped to handle liberalization, and avoided
hot money flows.
USAID also allowed Costa Rica to privatize its state run-industries gradually and
remove its industrial protections slowly throughout the late 1980s and early 1990s.
Another important aspect of US aid was that it was used for the “voluntary labor mobility
program,” which was a program that helped retrain and downsize Costa Rica’s public
sector employment in the early 1990s, as opposed to having to drastically and
immediately reduce the public sector in order to meet austerity requirements.96
Also, due
to US aid, Costa Rica was able to largely keep its social safety net and welfare spending
in tact.97
A final major expenditure of US aid money was to stabilize Costa Rica’s
northern border and limit turmoil spillover from Nicaragua.98
Thus, even though the
1980s were a turbulent time, US aid funded Costa Rica’s debt, allowed it to gradually
introduce structural reforms, and to slowly downsize its public sector. This was certainly
a far cry from the experience of many other Latin American countries in the 1980s, many
of which had to strictly meet austerity requirements and rapidly liquidate state holdings.
These sharp measures were often accompanied by a simultaneous raise in taxes in order
to meet fiscal austerity measures. Unsurprisingly, the combination of eliminated
industries, reduced social safety nets, and increased taxes proved to be incredibly jarring
to many Latin America societies. While the Washington Consensus reforms were often
harshly implemented, most states had little choice, since the ISI program had rendered
many states in Latin America nearly insolvent.99
Clark,Transnational Alliances, pg 80-81
97 Stephen Haggard and Robert F. Kaughman. Development, Democracy, and Welfare States:
Latin America, East Asia, and Eastern Europe. (Princeton, NJ: Princeton University Press, 2008): 291-292.
98 Paus, Foreign Investment, pgs 137-143; Clark, Transnational Alliances, pgs 80-83.
99 Klak, pg 77

While it would be unrealistic to posit a counterfactual of Costa Rica having
collapsed without US aid, it is still fair to note that without US aid, Costa Rica would
have been in a much poorer position to capitalize on FDI in the 1990s without having
received so much assistance throughout the 1980s. Indeed, when heavy US aid decreased
and eventually stopped in the early 1990s after the US shifted its priorities away from
Cold War ventures, Costa Rica has had trouble running balanced budgets. While Costa
Rica has not been racking up egregious levels of debt, its continued budget deficits do
pose a risk to Costa Rica’s continued macroeconomic stability through creating
inflationary pressure with no easy remedies. Costa Rica’s social safety net and services
are salient issues, and attempts to reduce commitments have been met with strong
popular opposition.100
According to Eva Paus, there doesn’t appear to be a viable electoral
coalition that could negotiate the necessary fiscal adjustments.101
Furthermore, Costa Rica’s continued deficits have greatly reduced its ability to
continue investing in infrastructure, which, as evidenced in the necessary infrastructure
concessions made to Intel, is desperately needed to keep attracting high-tech
investment.102
In fact, Intel president Craig Barrett even criticized Costa Rica for its
failure to make continued necessary investments in infrastructure and education.103
Since
2000, according to Mirchandani and Condo, Costa Rica has seen its growth rate decline
and its regional advantages in high-tech electronics begin to erode.104
The second major tool that the US used to support Costa Rican stability in the
1980s was the Caribbean Basin Initiative (CBI). Under the CBI, the US eliminated tariffs
for most non-traditional exports for member states, and allowed for the re-importation of
Paus,Foreign Investment, pg 162.
100 Haggard and Kaufman, pg 292.
102 Mirchandani and Condo, pg 339
103 Paus and Gallagher, pg 70.
104 Mirchandani and Condo, pgs 336-338

assembled US materials to only be taxed for the value added.105
The creation of the CBI
had major effects on Costa Rica. Not only did it make it easier for Costa Rica to sell its
products in the US, which is where 70% of Costa Rica’s exports went at the time,106
but it
also created strong incentives for US firms to invest in the Caribbean region. Under the
CBI, US firms could set up assembly plants, freely send materials and bring back finished
products, and only have to pay a duty on the comparatively cheaper labor involved in
assembling the products. Considering Costa Rica’s great dependence on the US market,
the CBI played a considerable role in making Costa Rica’s FDI strategy even feasible.
Without preferential trade treatment on non-traditional exports from the US, there
would have been much less incentive for many firms to invest in Costa Rica, regardless
of how beneficial the tax benefits were or persuasive the investment agency was, since
the savings would have been eaten away by tariffs. Thankfully for Costa Rica, the
benefits of the CBI have been continued under the current Central American Free Trade
Agreement (CAFTA), and there doesn’t seem to be any feasible reasons in the near future
for Costa Rica’s trade relationship with the US to change.107
Finally, even though Costa Rica’s dependence on the US has been decreasing, it
remains highly dependent on the US for its source of FDI, creating a risky situation. For
example, in 2003, 60.5% of FDI in Costa Rica came from the US. Mexico and Canada
were second and there, with a mere 7% and 5.75%, respectively.108
If the US, for some
reason decided to alter Costa Rica’s favorable trade status, that would almost certainly
have disastrous effects for Costa Rica, regardless of any endogenous Costa Rican factors.
Long-Term Attraction Strategy
105 Paus, Foreign Investment, pgs 142-143.
106 Clark, Nontraditional Export Promotion, pg 205
107 Daniel P. Erikson, “Central America’s Free Trade Gamble.” World Policy Journal 21 No. 4
(Winter 2004/2005): pgs 19-21
108 Mirchandani and Condo, pg 354.

The most important aspect of an FDI-led development strategy is to implement an
appropriate long-term strategy to boost the utility of FDI investments and increase
spillovers and backwards linkages. However, before these linkages can occur,
information asymmetries between investors and the host country must be overcome. In
Costa Rica, the IPA CINDE was the primary designer of Costa Rica’s strategy and
primary lobbyer of investors. Indeed, it was the central player in overcoming
informational asymmetries. CINDE, however, was not truly a Costa Rican agency. In
reality, it was a foreign creation, was predominantly foreign ran, and was primarily
foreign funded.109
While Costa Rican business and political elites were not non-existent
or purely passive actors, the high degree of involvement by USAID is a remarkable fact.
Furthermore, with the decline of USAID involvement, CINDE’s attraction capabilities
also declined.
The story of the success of CINDE cannot be told without acknowledging the
primary role that USAID played in its creation and operation. As was noted above,
CINDE is a private, not government run, agency. For the first nine years of its existence,
CINDE was entirely funded by USAID, not the Costa Rican business community or
government.110
Even after the eventual withdrawal of USAID from Costa Rica, a
considerable amount of its funding remains based in an endowment set up by USAID,
Fundación de Exportaciones (FUNDEX).111
To be clear, the private nature of CINDE has
actually been an asset in many ways for CINDE and Costa Rica. Its autonomy and
diverse make up of consultants and Costa Ricans have kept it from being entangled in
special interests, and CINDE has been able to maintain a strong image of independence
109 Clark, Transnational Alliances, pg 79-91.
110 Clark, Transnational Alliances, pg 89
111 Clark, Nontraditional Export Promotion, pg 202.

and competence to foreign investors.112
As Morrissett-Andrews argue, the independence
of an IPA is directly correlated with greater attraction capabilities.113
Furthermore, Intel
executives also noted CINDE’s independence as a positive in their negotiations.114
However, the reality remains that the operational capability of CINDE was
directly linked to its amount of funding. Its amount of funding was solely determined by
USAID expenditures. The reduction of USAID funding resulted in immediate contraction
of CINDE’s capabilities. CINDE was established in 1983 with a grant of $21 million and
had annual operating budgets from $4 million to $8 million during most of the 1980s. At
its peak, CINDE had a staff of 400 and could afford to hire many of Costa Rica’s most
talented officials. After the loss of direct US funding in 1991, its annual budget decreased
to $1.5 million, which was primarily from FUNDEX grants. It reduced many of its
training programs, decreased its staff all the way to 29, and closed all of its foreign
offices except for its New York office.115
The loss of foreign offices is particularly detrimental. Without them, Costa Rica
has greatly reduced its abilities to make contact with new potential investors, its ability to
compete with other sites of FDI, and the ability to find new markets for Costa Rican
exports. Foreign offices play a key role in overcoming information hurdles. Even though
these are considerable losses neither the government nor any private entity in Costa Rica
has been thus far willing or able to replace the loss of external funding and maintain the
level of access and benefits the foreign offices provided.116
Thus, CINDE has many fewer
resources to continue attracting high value FDI. With the loss of USAID funding, CINDE
112 Nelson, pgs 11-12; Paus, Foreign Investment, pgs 164-166.
113 Jacques Morisset and Kelly Andrews-Johson, FIAS Occasional Paper 16: The Effectiveness
of Promotion Agencies at Attracting Foreign Direct Investment. (Washington D.C.: The World Bank, 2004):
pgs 1-6, 47-51
114 Spar, pg 16.
115 Paus and Cordero, pg 3.
116 Clark, Nontraditional Export Promotion, pg 203.

has not only lost its foreign offices, but it has also lost strategy planning capabilities. With
its smaller budget and staff, CINDE has had markedly fewer resources to develop a full-
fledged FDI strategy and invest in ensuring that strategy’s fulfillment.117
Interestingly, the scarcity of monetary resources has been problematic for Costa
Rica’s development in the past as well. Costa Rica had started its own investment
promotion agency back in 1968, Centro de Promociones de Exportaciones e Inversiones
(CENPRO), which was a resounding failure. Beyond CENPRO’s crippling internal
political divisions and incoherent strategy, one of CENPRO’s major limitations was its
low budget and inability to attract high skilled employees or consultants. Since CENPRO
could only offer meager public salaries, it couldn’t afford to hire top quality business
people out of the private sector. Even more impossible was the prospect of CENPRO
hiring foreign consultants.
Even after the lead and generous external funding of CINDE, the Costa Rican
government has had trouble further funding other necessary initiatives to their
investment-attraction strategy. A specific example of this is the Costa Rican Proveé
(CRP), which was founded in 2001 with the goal of helping increase backwards linkages
and spillovers by researching how to create additional local sourcing opportunities. Even
though CRP was officially part of the Costa Rican government, it also required external
funding from the Inter American Development Bank and CINDE to be created and run.
Although CRP has been responsible for the creation of 140 new linkages, it only has a
staff of seven and an annual budget of $275,000. Since it only has the funds to act in an
advisory capacity, it has been unable to make a larger impact. Many small Costa Rican
117 Paus, Foreign Investment, pgs 165-167.
Clark, Transnational Alliances, pgs 88-89.
Paus and Gallagher, pgs 68-69.

businesses that have been targeted as possible linkages have been unable to receive the
loans necessary to transform their businesses and create linkages.118
Thus, with the loss of US aid, Costa Rica has seen a strategy wide reduction in
capabilities. This is not surprising considering two realities of Costa Rica’s strategy. First,
as noted above, it was created with external resources. Second, Costa Rica’s main
destination of FDI, free zones, creates no new tax revenues to fund these new programs
and skill and infrastructure investments. The Costa Rican government’s tax base has
remained around 11-13% of its GDP119
. Thus, even though Costa Rica has seen increased
investment and exports, it has not been able to change its tax base or find new sources of
revenues. However, even though foreign exchange has increased, Costa Rica’s attraction
policies have actually caused their tax revenues from foreign exchange to decrease. As a
share of total tax revenues, international exchange has decreased from 35% in 1987 all
the way to 8% in 2004.120
Obviously, trade liberalization was a key component of Costa
Rica’s ability to attract more investment which would necessitate a decrease in some
revenues. However, if the Costa Rican government can not find ways to obtain revenue
from the increased economic activity, the country will be unable to continue invest in the
necessary human capital and infrastructure that attracted investors to the country in the
first place. Eva Paus, who has offered the most extensive critiques of Costa Rica’s
attraction strategy, argues that between Costa Rica’s 13% of GDP tax revenue and
CINDE’s $1.5 million budget, there are not enough resources to implement an effective
and long-term investment attraction policy and adequately invest in infrastructure and
educational resources.121
118 Paus and Gallagher, pgs 68-69.
119 Cordero and Paus, pg 13; Paus and Gallagher pg 70.
120 Cordero and Paus, pg 11, Paus, Foreign Investment, pgs 170-171,
121 Cordero and Paus, pg 13; Paus and Gallagher pg 70

Even beyond funding, informational resources are also a major issue in designing
a long-term investment attraction strategy. Information refers to gathering all the
information and input required to develop the initial investment strategy as well as the
ability to effectively adjust it. This requires both a full assessment of the capabilities and
strengths of the host country for investment opportunities, as well as researching potential
investors and finding the right combinations, then planning the appropriate policies to
pursue their findings. This was bore out in CINDE’s courting of Intel and its ability to
overcome the informational asymmetries between the two.
Even beyond the cost of the interactive process, a fundamental assumption of the
FDI model is that inefficient business practice and ignorance of the practices of
international markets inherited from the ISI model was a primary obstacle to economic
development in LDCs. One of the main reasons that FDI is believed to be the solution is
because of its supposed introduction of efficient business practices and models along with
its ability to force a country to learn to compete at the international level. This raises the
logical question of how solely domestic actors in the LDC would be able to properly
conceive of an appropriate FDI attraction strategy.
In the case of Costa Rica, not only was CINDE funded by USAID, it was also
entirely conceived and, for the first three years of CINDE’s existence, run by the Costa
Rican office of USAID.122
In fact, CINDE was an entirely new project. CINDE was the
largest, private-sector business promotion project that USAID had ever attempted up until
that point. Of course, CINDE quickly incorporated many significant Costa Rican actors.
In fact, CINDE’s recruitment of many prominent Costa Ricans is a main reason that
CINDE was able to achieve legitimacy within Costa Rica and to foreign investors.123
122 Clark, Transnational Alliances, pgs 89-90
123 Clark, Transnational Alliances, pg 81-82.

However, the entire initial structure and strategy was developed through USAID officials
hiring outside consultants who advised USAID and Costa Rican businesspersons on how
to design the program. According to internal memos, neither Costa Ricans nor the US
officials knew exactly how they were going to develop a diversified, export-led economy
in Costa Rica. Thus, the major strategy that USAID followed was to hire top-quality
business consultants to come in and evaluate Costa Rica and provide input on the
investment strategy.
Even more interesting is that CINDE underwent a major redesign in 1985 because
of pressure from Washington for quicker results.124
CINDE again went on a spree of
hiring foreign consultants. Actually, for the next seven years, foreign consultants were
paid by USAID to manage CINDE. The main assets the Costa Ricans provided were their
opinions on domestic matters, local lobbying, and added prestige to the program. All
important planning and training programs were under the direction of foreign consultants,
who were on the dime of USAID.125
In the case of Costa Rica, external resources were central to the success of the
FDI-led growth that has occurred. Not only did external aid help maintain a stable
investment climate, it also was primarily responsible for allowing Costa Rica to
overcome information asymmetries with investors.
Discussion: How Affordable Is an Investment Promotion Strategy?
The experiences of Costa Rica indicates that FDI-led development theories have
problematically omitted the key issue of resources, both monetary and informational,
necessary to overcome informational asymmetries between potential host countries and
investors. Even though the FDI-led model keeps private actors and market forces central
124 Clark, Transnational Alliances, pg 88.
125 Clark, Transnational Alliances, pgs 84-86

to development, and the state’s new role in designing a long-term strategy is far less than
the ISI model’s entire fabrication of industries, investment attraction measures require
access to considerable monetary and informational resources. In theory, a government
should be able afford to create and staff an investment agency, make some concessions to
influence investors, and increase investment in human capital and infrastructure.
However, the reality remains that states that are small, trade dependent, under developed,
and who were in many cases rendered insolvent in the 1980s, are not likely to be able to
afford such an extensive and dynamic program. This is especially true since the task of an
investment agency is enormous, education and infrastructure are not cheap, and
concessions can cause the forfeiting of new revenue sources.
There are three key characteristics of the world economy and LDCs that should
either be incorporated into the literature of FDI-led growth or that suggest the limited
applicability FDI-led growth. The first is the structural constraints of LDCs. The second
is the lack of and the high cost of credit for LDCs. The third is the limited nature of
investment opportunities. These three realities work together to place major constraints
on LDCs and their ability to afford to attract FDI investment.
First, most LDCs are small, on the periphery of the world economy, and are
largely trade dependent. Furthermore, many of them have both problematic colonial
heritages and suffer from the effects and distortions of ISI programs. In other words, most
of them do not have a booming industrial tax base or very much domestic capital
resources. It is not likely for a country with a relatively small and unproductive tax base
to be able to embark on an extensive investment promotion strategy, infrastructure
investment, and skill investments. As the ISI-induced balance of payments crises showed,
smaller LDC states do not operate in a world where the state can just create money. The

limited economic activity in many LDCs puts real limits on state capacity. The
experience of Costa Rica suggests that many countries will not have the state capacity to
embark on an extensive FDI attraction policy since Costa Rica itself is a most-likely case
to be able to succeed.
Second, even if states do not have a large pool of domestic resources, it should
theoretically be able to attain credit. However, as has been shown by authors like Robert
Wade and Erik Wibbels, LDCs have far fewer international credit options and limited
internal currency manipulation ability. Robert Wade argues the international credit market
is not structured in the interests of LDCs.126
He argues that when the US left the Gold
Standard in the 1970s the world economy was flooded the with US currency. This excess
currency chases too few actual goods, resulting in destructive speculation bubbles and a
marked increase in the world’s financial volatility. Since all currencies float against each
other, Wade argues, this has created a currency competition. The only way smaller
countries can get investors to buy their currency is through offering high interest rates.
This has the de facto effect of making the price of debt for LDCs much higher than for
the US or other developed nations.
Not only is government debt more expensive for smaller countries (which on top
of that have smaller economies and tax bases to be able to generate the revenues needed
to pay back debt) Erik Wibbels demonstrates that structural factors (the limited economic
development and limited exports of LDCs, the lack of credit available for LDCs, and the
use of interest rates to attract capital) has much greater affects on a peripheral countries
ability to make political choices and choose between long-term and short-term goals in
economic crises, as opposed to core countries. By looking at records of state spending,
126 Robert Wade. “Choking the South.” New Left Review 38 (March/April 2006): 115-127.
Erik Wibbels, “Dependency Revisited: International Markets, Business Cycles, and Social
Spending in the Developing World,”International Organization 60 (Spring 2006): pgs 433–468.

Wibbels makes four key findings: First, he demonstrates that exogenous shocks create a
much larger loss of revenues for peripheral countries as opposed to core countries.
Second, he finds that external circumstances are the cause of the majority of peripheral
countries economic shocks. Third, he finds that the costs of economic crises are much
higher for peripheral countries. Fourth, he finds that social spending in peripheral
countries is pro-cyclical and that only core countries can afford to spend counter-
cyclically during crises. For this paper’s purposes, the last finding is the most important.
Since peripheral countries cannot afford to spend counter-cyclically, which means that
they are least able to engage in a long-term FDI strategy in the times when they would
need to the most. If countries have to spend pro-cyclically, then they are likely to only be
able to afford the luxuries of investing in FDI attraction during economic booms. The
flip-side to this, Wibbels argues, is that economic crises force countries to choose short-
term over long term goals. Also, Wibbels demonstrates that in periphery countries, social
security spending was more stable, while human capital investments were much more
procyclical. Again, this means the constant investment in skill and infrastructure
upgrading that transnational firms require of investment sites can only be done during
economic booms. When crises occur, social safety nets are a much more significant
political liability than long-term infrastructure investments. These realities are even
further magnified when considering that peripheral countries are much more affected by
the economic crises that they have much less to do with creating.
The third major limitation of the FDI-led strategy is the limited nature of
international commerce. Even though international commerce has greatly increased in
recent decades, two key facts should be pointed out. First, even though more companies
are expanding abroad, the vast majority remain nationally based and focused. As Robert

Gilpin and Robert Boyer have argued,127
international trade is actually at much lower
levels today than it has been in the past, particularly the end of the nineteenth century.
The only international commodity that really has seen a huge boom is finance. Second,
most transnational firms are actually products of unique market imperfections and state
created incentives. Thus, the current confluence of incentives and policies that have made
global expansion profitable for some firms isn’t a guaranteed facet of the future economy,
nor is it necessarily a natural progression or even a rapidly growing trend currently. Thus,
while not to discount the potential benefits of FDI investment, the amount of FDI
investment that is available for attraction is not an infinite resource.
These three characteristics, along with the case study of Costa Rica, in my
opinion, have two possible implications for other countries seeking to attract FDI in order
to pursue economic development. First, many under-developed, periphery countries are
not only dependent on core states as trading partners, but are also more dependent than
previously recognized in the FDI literature on them for the resources and information
required that could lead to necessary economic development. If this dependence is the
case, then a successful development model would need to explicitly incorporate
international relations theories into their model in order to better understand actual
development trajectories. Only when core states were compelled to provide resources
would they be available for under-developed countries to use.
The second possible implication is a new source of resources for funding and FDI
attraction strategy should be found. Outside of external aid and assistance, the most likely
alternate source for these resources would be the discovery of significant extractable
127 Robert Boyer, “Globalization Myths and Realities: One Century of External Trade and
Foreign Investment,” in Robert Boyer and Daniel Drache. States Against Markets. (New York: Routlege,
1996);
Gilpin, pgs 278-304.

natural resources. However, even then, the country would have to avoid the large pitfalls
involved in the ‘resource curse,’ and then use the monetary assets to appropriately acquire
the necessary informational resources that would allow them to overcame information
asymmetries with investors. Furthermore, the viability of endogenous funding has not
been conclusively disproved. It is yet to be seen if generous tax breaks are vital to
investment attraction. For example, Biglaiser and DeRouen, Jr., find that tax reforms
were not a significant predictor in a large-N study on FDI investments.128
Furthermore,
Moran disputes the necessity of tax breaks to attract investors.129
Thus, it is feasible that a
self-sufficient FDI attraction policy can be designed.
However, if resources and information are largely exogenous to under-developed
countries, the more likely implication is that the political and strategic actions of the
external actors who possess the necessary resources (namely core countries) are an
important determinant of which countries have the possibility of achieving development.
The most likely option in this scenario would be to factor in a country’s ability to attract
foreign aide, as well as FDI, would need to become a central part of a country’s
development strategy. The most likely solution, especially in light of the Costa Rican
case, appears to be incorporating international relations understandings into
developmental theories. Specifically, hegemonic stability theories seem to hold particular
promise. As was shown earlier in the paper, aid money and, consequently, CINDE ability,
rose and fell roughly along with the US’s interest in anti-communist policies in the
region. With the loss of US interest and aid, Costa Rica has lost ground in utilizing FDI.
Furthermore, another pertinent example is the 1960s Dominican Republic. At the time,
For a discussion of the ‘resource curse’ and an investigation of how natural resources affect
economic development, see Edward Barbier, Natural Resources and Economic Development, New York:
Cambridge University Press, 2005
128 Biglaiser and DeRouen, Jr., pgs 59-69.
129 Moran, pg 30.

the Dominican Republic received more aid than Southeast Asia. Indeed it was the
destination of the most US aid of any country because of the US’s strong concerns over
Cuba at the time.130
However, as the US’s anti-communist policies shifted more focus on
Vietnam from Cuba, aid priorities shifted. However, the Dominican Republic lacked
political and macro-economic stability during the time and was unable to utilize the large
inflows of aid as affectively as some of the Southeast Asian Tigers. Obviously, much
more investigation would be required to adequately assess this model.
Conclusion
In the case of Costa Rica, it went from being a relatively peaceful, but under-
developed, Latin American state trapped in a balance of payments crisis in 1980, to being
a high-tech exporter and prime example of how development through FDI is supposed to
occur.131
While domestic factors such as Costa Rica’s legacy of democracy, stability, rule
of law, investments in education, which were certainly vital factors in determining a
transnational corporation’s choice of which country to invest in, the case of Costa Rica
suggests that those factors are not the only ones that explain the process of FDI led
growth. A vital component to Costa Rica’s success was heavy assistance and involvement
by external actors, namely USAID, which provided the bulk of the monetary and
informational assistance required to maintain macroeconomic and political stability,
design a long-term plan to attract high-value FDI, and overcome informational
asymmetries with investors.
To be clear, the policies of USAID were not exploitative, surreptitious, or coerced
on Costa Rica. CINDE was a private, extra-governmental organization, and it only held
the power of influence. By all accounts, the Costa Rican government determined its own
130 Andrew Shrank, “Foreign Investors, Flying Geese, and the Limits to Export-Led
Industrialization in the Dominican Republic,” Theory and Society 32 No.4 (August, 2003): pg 423.
131Moran, pg 30

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