Attitude toward Foreign Direct Investment
Costa Rica actively courts foreign direct investment (FDI), placing a high priority on attracting and retaining high-quality foreign investment. The Foreign Trade Promotion Corporation (PROCOMER) as well as the Costa Rican Investment and Development Board (CINDE) lead Costa Rica’s investment promotion efforts. Costa Rica has continued an ambitious program of negotiating, signing, and ratifying free trade agreements, all of which encourage greater openness to foreign trade and investment. Costa Rica together with El Salvador, Guatemala, Honduras, Nicaragua, and the Dominican Republic, is a signatory to the U.S. – Central America – Dominican Republic Free Trade Agreement (CAFTA-DR). CAFTA-DR, which entered into force in Costa Rica January 1, 2009, has improved the investment climate by strengthening the protection of intellectual property rights, providing a mechanism for arbitration, opening the insurance and telecommunications sectors to competition, and assuring access to markets in other CAFTA-DR economies. Agreements with Chile, Canada, CARICOM (Caribbean nations), Panama, China, Peru, Singapore, Mexico, the European Union, and the European Free Trade Association are in force, while an agreement with Colombia is awaiting final approval by the Colombian legislature to enter into force.
Other Investment Policy Reviews
Costa Rica’s investment policy reviews by international financial institutions over the last several decades tend to be positive but qualified by a list of problems that need immediate attention, for example underfinanced infrastructure, lax intellectual property rights (IPR) enforcement, slow environmental permitting and (until recently) very little appropriate sewage treatment. Currently, Costa Rica’s persistent and growing government budget deficit is of particular concern.
The Organization for Economic Cooperation and Development (OECD) completed a comprehensive investment policy review in September 2013: http://www.researchandmarkets.com/reports/2686091/oecd_investment_policy_reviews_costa_rica_2013. In 2014, Costa Rica became the 45th country to adhere to the OECD Declaration on International Investment and Multinational Enterprises. OECD accession talks for Costa Rica have begun; within that context the OECD in February 2016 published the “Economic Assessment of Costa Rica 2016”: http://www.oecd.org/economy/surveys/economic-survey-costa-rica.htm.
The World Trade Organization (WTO) completed its most recent trade policy review in September 2013: http://www.wto.org/english/tratop_e/tpr_e/s286_e.pdf.
Laws/Regulations on Foreign Direct Investment
The Costa Rican Judicial System is made up of the Civil, Administrative, and Criminal Court structure. The judicial system generally upholds contracts, but caution should be exercised when making investments in sectors reserved or protected by the Constitution or by laws for public operation. Investments in state-protected sectors under concession mechanisms can be especially complex due to frequent challenges in the constitutional court of contracts permitting private participation in state enterprise activities. Furthermore, independent government agencies, including municipal governments which grant construction permits, can issue permits or requirements that may contradict the decisions of other independent agencies, causing significant project delays.
Costa Rica’s commercial code details all business requirements necessary to operate in Costa Rica. The laws of public administration and public finance contain most requirements for contracting with the state.
Investors must exercise caveat emptor (buyer beware) since many firms operate in the informal sector of the economy. Appropriate due diligence should include confirming a company’s registry and formal participation in the Costa Rican economy, such as paying taxes and registering all workers with the Social Security system.
Costa Rican websites useful to help navigate laws, rules and procedures include that of the investment promotion agency CINDE, http://www.cinde.org/en (labor regulations), the export promotion authority PROCOMER, http://www.procomer.com/ (incentive packages), and the Health Ministry, https://www.ministeriodesalud.go.cr/ (product registration and import/export). In addition, the solicitor general’s office (www.pgr.go.cr/SCIJ) compiles relevant laws.
Costa Rica’s single-window business registration website “crearempresa.go.cr” brings together the various entities – municipality and central government agencies – that must be consulted in the process of registering a business in Costa Rica. The website “Global Enterprise Registration” www.GER.co ranks the crearempresa.go.cr website as 10th of the 26 single-window business registration portals evaluated globally. A new company in Costa Rica must typically register with the National Registry (company and capital registry), Internal Revenue Directorate of the Finance Ministry (taxpayer registration), National Insurance Institute (INS) (basic workers’ comp), Ministry of Health (sanitary permit), Social Security Administration (CCSS) (registry as employer), and the local Municipality (business permit).
The World Bank’s “Doing Business” evaluation for 2016, http://www.doingbusiness.org, states that business registration takes a total of 9 steps in 24 days, where most of those steps are simultaneous or take one day, while the municipal business license might take 15. In contrast the World Bank in its website “investing across borders” http://www.iab.worldbank.org for 2014 states that 14 procedures and 63 days are needed to establish a foreign-owned limited liability company in Costa Rica. Notaries are a necessary part of the process and are required to use the “crearempresa” portal when they create a company.
The investment promotion agency CINDE attends to potential and current investors in a set of specific economic activities (see next section), while the Tourism Institute (ICT) attends to potential investors in the tourism sector. Neither agency limits its service to investments above a certain size or potential payroll.
Micro, small, and medium enterprises are differentiated by activity and defined according to a formula that gives 60% weight to the number of employees, 30% weight to income, and 1% weight to assets. For example, a service firm with 4.5 employees, USD 80,000 annual net revenues and nominal assets would barely qualify as “micro” enterprise. Promotional programs tend to be focused on particular kinds of small enterprise, for example those owned by women, youth, or artisans. Several programs focus on supply chains. Foreign-owned companies have the same opportunities available to them as their locally-owned counterparts.
The World Bank “Investment Across Borders”
http://iab.worldbank.org – This “Investment Across Borders” site provides a useful overview of Costa Rican practices as they impact the investment climate.
Costa Rica’s dynamic and well-respected investment promotion agency CINDE has had great success over the last several decades in attracting and retaining investment in specific areas, currently services, advanced manufacturing, life sciences, light manufacturing, and the food industry. In addition, the Tourism Institute (ICT) attends to potential investors in the tourism sector. These targeted industries can be found with the following key words as defined in https://new.export.gov/industries: Services, Aerospace and Defense, Industrial Equipment and Supplies, Health Technologies, Food Processing and Packaging, and Travel.
Costa Rica’s chief industrial strategy in recent years has consisted of focusing investment promotion and aftercare efforts in these particular business sectors in order to encourage the formation of overlapping business clusters which in turn have led to synergies that encourage other similar companies to invest in Costa Rica.
Limits on Foreign Control and Right to Private Ownership and Establishment
Costa Rica recognizes and encourages the right of foreign and domestic private entities to establish and own business enterprises and engage in most forms of remunerative activity. The exceptions are in sectors that are reserved for the state (legal monopolies) or that require participation of at least a certain percentage of Costa Rican citizens or residents (electrical power generation, transport services, professional services and aspects of broadcasting). In the areas of medical services, telecommunications and insurance, state firms operate but that does not preclude private sector competition.
All businesses must be registered in the national registry, thereby becoming national companies that may have national or foreign owners. The investment requirements for foreign and national persons and companies are identical. Businesses may be established starting from nothing, acquired, merged with, or taken over in much the same way as is done in the United States. Foreign partnerships with local businesses are quite common. Costa Rica’s one discriminatory limitation to foreigners’ control of land applies to the 200 meter strip of land along the coast defined as the Maritime Terrestrial Zone; concessions in this zone cannot be given to foreigners or foreign-owned companies. Water, ground transport, and freight services likewise are limited to majority national ownership. Mass media and advertising agencies are subject to some limitations to foreign participation. The state also exercises some monopoly control in some economic sectors as referenced below in the Competition from State-Owned Enterprises in the section: Information and Communication; Energy; Health Technologies.
Costa Rica does not have an active privatization agenda.
Screening of FDI
Costa Rica does not have a formal mechanism for screening foreign investment. Such investment is expected to comply with local law and practice.
Several public institutions are responsible for consumer protection as it relates to monopolistic and anti-competitive practices. The “Commission for the Promotion of Competition” (COPROCOM), a semi-autonomous agency housed in the Ministry of Economy, Industry and Commerce, is charged with investigating and correcting anti-competitive behavior across the economy. SUTEL, the Telecommunications Superintendence, shares that responsibility with COPROCOM in the Telecommunications sector. Both agencies are charged with defense of competition, deregulation of economic activity, and consumer protection. COPROCOM is considered to be underfunded and weak; the February 2016 OECD “Economic Assessment of Costa Rica” emphasizes the need to reform COPROCOM in order to assure regulatory independence and sufficient operating budget - http://www.oecd.org/economy/costarica-stronger-and-more-inclusive-growth-will-require-new-reforms.htm .