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Report: Planning Could Increase Investment

October 1, 2004

FOR Costa Rica to maintain its positionas one of Latin America’s top percapitarecipients of foreign direct investment,it must increase its supply ofEnglish-speaking workers, improve itstelecommunications services and maintainits international reputation as a politicallyand economically stable country.Even if all this is accomplished, toremain competitive, the country must alsooffer a fair and internationally competitivecorporate income-tax rate that is attractiveto transnational companies. Only then canCosta Rica achieve its full potential interms of attracting foreign direct investment,according to the United Nations2004 World Investment Report, releasedworldwide last week.In Costa Rica, representatives of theUnited Nations Development Program(UNDP) and the Costa Rican InvestmentBoard (CINDE) presented the report.Prepared by the U.N. Conference onTrade and Development (UNCTAD), thereport aims to analyze the main trendsaffecting cross-border investment.DESPITE four straight years ofdeclining foreign investment flows to LatinAmerica and the Caribbean, foreign investmentto Costa Rica has remained stable.Foreign direct investment is defined as allnon-portfolio investment conducted byforeign companies in a country.In recent years, the country has consistentlyranked among the top five recipientsof per-capita foreign direct investment inLatin America and the Caribbean (TT,Sept. 12, 2003).Last year, Costa Rica received $577million in foreign investment, down from$662 million in 2002 — the year Dutchbeer giant Heineken International acquired25% of Costa Rican firm Florida BebidasS.A., the parent company of local brewerCervecería Costa Rica, for $229 million.The Central Bank is expecting foreigninvestment to increase slightly this year to$585 million.Nevertheless, the country needs an“aggressive plan” with “concrete steps” toimprove its investment climate, said TomásGilmore, one of CINDE’s directors.WORLDWIDE foreign direct investmentdropped 18% last year, totaling $560billion, according to the U.N. report. Thisfigure is substantially lower than the $1.4trillion invested worldwide in 2000.However, a recovering world economy,growing international trade andincreasing corporate revenues have madethe outlook for 2004 much brighter,according to the report.The main focus of this year’s WorldInvestment Report is the “shift to services.”Since the 1970s, an increasing percentageof foreign investment has beencomposed of services, instead of goods.Services currently constitute 60% of globalforeign investments.The shift to services is evident in CostaRica. During the past five years, severalcorporations have transferred the serviceportions of their operations – customer service,accounting and human resources – toCosta Rica.FIVE years ago, U.S.-based Procter &Gamble, producer of personal-care andhousehold items, chose Costa Rica as thelocation of its “Global Business Services”operation.Today, Procter & Gamble employs1,300 Costa Ricans and provides 28 differenttypes of services, including accounting,payroll and bank account administration,for the company’s employees and productionplants in 22 countries in the Americas.Call center Sykes Latin America isanother foreign “services” firm that hasinvested in Costa Rica. Sykes employs1,400 Costa Ricans and residents, whohandle tech-support, financial services andconsumer-product services in four languagesfor 16 multinational companies.Investments in services such as thesecan have a dramatic impact on a country’seconomy, Gilmore said.Countries that provide services earnjobs, foreign currency and skills, whichconstitutes a truly virtuous cycle, agreedJan-Jilles van der Hoeven, UNDP representativein Costa Rica.TO continue to attract foreign investmentin services and other areas, the countryneeds to improve the quality of itshuman resources, specifically by increasingthe number of English-speaking professionals,Gilmore said.Special emphasis needs to be made onimproving the teaching of English verbalskills and accents, which are essential forcustomer service, and increasing the numberof professionals with a working knowledgeof technical, accounting and financialterms in English, Gilmore said.Five years ago, five in 10 people whoapplied for a job that required English-speakingskills met the hiring criteria. Today, onlythree in 10 applicants fit the bill, he said.The first companies to arrive took thecream of the crop, Gilmore continued. Thishas led to a shortage of qualified Englishspeakers and puts Costa Rica at a disadvantagewith outsourcing powerhouse India,where English is widely spoken, and ElSalvador, which is home to thousands ofEnglish-speaking expatriates and thus anideal spot for call centers, Gilmore explained.THE availability, quality and installationtimes for advanced telecommunicationsservices, such as broadband Internetand private data networks, also need to beimproved. This is especially important forservice firms, which need to be in constantcommunication with their offices in differentparts of the world.More than two years of uncertaintyover possible changes to the country’s taxregime, particularly in regard to the corporateincome tax, have also negativelyaffected foreign investment, Gilmore said.Companies are less likely to investlarge sums of money on a new operation inthe country or expand their current one ifthe rules of the game aren’t clear, he said.Since 2002, the Legislative Assemblyhas been reforming the Permanent FiscalReform Package. The tax bill has finallyreached the floor of the assembly andcould be voted on by legislators in thecoming weeks or months (TT, Sept. 24).Under the plan, the corporate incometax would drop from 30% to 25% in 2010– substantially higher than the 15% originallyproposed.The country’s free zones, which untilthe end of 2009 will benefit from taxexemptions, have expressed concern overthe proposed rate, calling it not “internationallycompetitive.”Gilmore said he is concerned about theproposed tax rate, but considers it betterthan the uncertainty that’s plagued thecountry in recent years.“Obviously for Costa Rica to propose amore severe tax rate than the ones inMalaysia or Ireland is a source of concern,”Gilmore said. “However, in myopinion, the biggest problem is the uncertaintycaused by not clearly defining thecountry’s tax legislation.”

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