U.S. firms are drawn by the country's lower costs, educated and bilingual workforce, political stability, tax breaks and proximity.

LaTimes
By Marla Dickerson
March 18, 2006

SAN JOSE, Costa Rica - The crates that leave this Central American nation these days are more likely to be stuffed with microchips and telecom components than the bananas that once represented Costa Rica's plantation economy.

With little fanfare, Costa Rica has attracted hundreds of millions of dollars in investment from some of the best-known names in technology, including Intel Corp., Hewlett-Packard Co. and Microsoft Corp. Medical device makers and pharmaceutical companies are sprouting in the tropical heat. And the nation is becoming a hub for call centers and back-office outsourcing.

Seattle-based Washington Mutual Inc. recently announced it would cut 600 loan processing jobs in Chatsworth and move some of them to Costa Rica. Palo Alto-based HP plans to nearly triple its business service workforce here to 3,500 workers within two years. The lure: lower costs, an educated, bilingual workforce, political stability, fat tax incentives and its location.

"We're shooting to be the Irish," Roberto Leiton Garro, an executive at Art in Soft, a Costa Rican software company, said of his nation's ambitions to emulate the Celtic Tiger.

Indeed, like Ireland before it, this small nation is leveraging talent and technology to catapult an agrarian economy into the Digital Age. In the process, it is capitalizing on a trend known as "near-sourcing" that has American firms establishing facilities closer to home.

Although Mexico, Nicaragua and other Latin American nations have benefited as well, Costa Rica's focus on tech-related industries has helped it achieve Central America's highest standard of living and surprising stature in the tech world.

It ranks third behind powerhouses India and China as the most competitive offshore destination, according to a 2005 report on outsourcing by two consulting firms. Not bad for a country roughly the size of Vermont and New Hampshire combined, and whose population of just over 4 million is less than half the size of Los Angeles County's.

When medical device maker MedTech Group Inc. was looking for a low-cost location to put a plant, giants China and India loomed as obvious choices.

But the New Jersey-based manufacturer of surgical tools and other medical products chose Costa Rica, where health science firms such as Baxter International Inc. and Boston Scientific Corp. had already set up shop.

Now when MedTech President George Blank needs to call someone in the Costa Rican plant, he knows the facility is just an hour behind East Coast time. And instead of spending nearly a day traveling to Asia, he can be in the capital, San Jose, within 4 1/2 hours on a nonstop flight.

When he lands, he finds plenty of English speakers attuned to the needs of the U.S. market. He says he has never been asked to pay a bribe, a routine cost of doing business in many developing countries. And Blank says he doesn't lose sleep worrying that a competitor will swipe his company's designs, a risk in places such as China, where intellectual property rules aren't widely enforced.

"The actual going and doing and seeing and working is much easier than it is in China," said Blank, whose Costa Rica plant began production in early 2005. "Business conditions are a little easier."

Costa Rica exports more software per capita than any other country in Latin America. Computer components have supplanted bananas as the nation's largest export product. Combined, the information technology and medical clusters employ about 30,000 workers in more than 300 companies, with most of that business materializing in the last decade.

A lot is riding on Costa Rica's ability to continue developing these sectors, which pay better than tourism and agriculture, the other pillars of its economy. With unemployment high, one-fifth of households mired in poverty and the economy growing more slowly than many would like, Costa Rican officials are banking on tech-related exports and services to keep the country climbing toward its goal of becoming the first developed nation in Central America.

Obstacles abound, the most obvious being Costa Rica's modest population, which can't produce the hoards of skilled workers needed to keep it among the top offshore destinations, said Mark Minevich, one of the authors of the outsourcing report.

He envisions Costa Rica following the path of Singapore, a small, tech-savvy nation that partners with bigger countries such as Malaysia and Indonesia, which provide much of the workforce for major projects.

"The strategy for [Costa Rica] is to do joint ventures," said Minevich, co-chair of the BTM Institute, a technology think tank based in Stamford, Conn. "And they're going to have to focus on niches."

Costa Rica's conversion from a largely farm-based economy to a tech-led one has its roots dating back more than a century. The nation made primary education free and compulsory in 1870, according to the Costa Rican Investment Board, a private entity.

But what really launched the nation on its upward trajectory was its decision to scrap its army in 1949. The resources that had gone to the military were reallocated to higher education, universal healthcare and other human development programs that have paid huge dividends over the decades.

Known as the "Switzerland of Central America" for being an oasis of peace in a region torn by conflict, Costa Rica boasts the region's oldest democracy, its highest per capita income and a 95% literacy rate on par with the United States.

"Costa Rica invested in its people," said Rosalía Morales Acosta, executive director of the Costa Rican Chamber of Information Technology and Communication. "That set the stage" for everything that followed.

Although the nation never became embroiled in the armed struggles that convulsed its neighbors, a 1980s economic crisis brought on in part by plunging prices for bananas, pineapple and coffee led Costa Rica to diversify into manufacturing. It set up tax-free trade zones to attract foreign companies, which at first consisted mainly of assembly plants producing garments for the U.S. market.

But as neighboring countries with lower wages began stealing those jobs, Costa Rica capitalized on its skilled labor pool by targeting industries such as electronics and telecommunications equipment. The strategy proved a sound one, said economist Andres Rodriguez-Clare, who has written extensively on Costa Rica's technology evolution.

Growing fast but under pressure to cut costs, U.S. electronics makers in the 1990s found in Costa Rica an abundance of low-cost, English-speaking technicians and engineers. Companies including telecom equipment makers DSC Communications Corp. - which was bought by France's Alcatel in 1998 - and Sawtek Inc., now part of TriQuint Semiconductor Inc., set up facilities.

Costa Rica's big prize, however, was Intel. The chip maker opened an assembly and testing plant in Costa Rica in 1998, after a huge recruitment effort that included then-president Jose Maria Figueres.

"It was a validation for the country," said Edna Camacho, general manager of the Costa Rican Investment Board, who said Intel's investment put Costa Rica on the radar of other firms.

Today, Intel has grown to be Costa Rica's largest high-tech employer, with 2,900 workers. English conversations float through the carpeted halls and uniform cubicles of the firm's gleaming campus outside the capital. Except for the rice-and-bean dish gallo pinto served in the company cafeteria, one would be hard-pressed to distinguish the facility from one in Silicon Valley.

That is also true about the caliber of the workforce, Intel public affairs manager Gabriela Llobet said. The Costa Rican facility last year beat out other Intel sites to land 150 new jobs in an area known as financial shared services, she said. The group performs tasks such as software development, circuit design, procurement and financial services for the rest of the company. That's proof the Costa Rican operation is globally competitive and capable of jobs beyond testing and assembly, Llobet said.

"This is a milestone," she said. "We have positioned ourselves as a place to provide services."

Costa Rica's talent also is on display in its software industry, which consists almost entirely of homegrown firms. One of the biggest is Art in Soft, which creates so-called migration software that allows companies to take their old software and convert it to new platforms.

Started by a Costa Rican computer science professor, Carlos Araya, the company's products are used worldwide. Microsoft became a minority investor in 2001.

Leiton, the company's project director, said Costa Rican universities were turning out top-notch technology workers. He said the problem was that there just weren't enough of them. He said his firm was already paying premiums for experienced programmers with English skills, who are in demand from a number of competitors.

"If we had a big contract that needed 200 people, we couldn't do it here, and that's nothing," Leiton said. "That's the biggest issue, whether the country itself is scalable."

Experts said Costa Rica faced other significant hurdles. Many complain that the government-owned telecommunications monopoly is slow and inefficient, and that a sector so critical to the growth of technology companies must be opened to private competitors. That's something that the nation's powerful public-sector unions have long resisted.

The World Trade Organization has declared the tax-free benefits offered to foreign companies in Costa Rica's free-trade zones an illegal export subsidy that must be phased out by 2009. Exporters such as Santa Clara, Calif.-based Intel say such incentives are crucial to keeping Costa Rica competitive. But lawmakers haven't come up with an alternative that would pass muster with the world trading body.

And Costa Rica has yet to ratify a Central American free-trade agreement that also is to include the Dominican Republic, El Salvador, Guatemala, Honduras, Nicaragua and the United States.

The Costa Rican public is deeply divided, but the nation's technology firms are strong supporters of the pact, which they say is critical to cementing access to the U.S. market, the destination for half of Costa Rica's exports.

"This country is at an inflection point," Leiton said. "The potential is here. But if Costa Rica doesn't take some necessary steps, we're going to miss the next wave."