Costa Rica’s Big Catch

The road from the international airport into this capital city leads past an old coffee plantation that is no longer economically viable.

Costa Ricans are hopeful that in the coming months, this relic of their past will be transformed into a beacon of their future as Intel Corp., the Santa Clara, Calif.-based computer chip giant, builds a $300-million complex at the site on the city’s outskirts.

Intel will be employing 2,000 well-paid two-year-college graduates and engineers--a quantum leap from the minimum-wage garment factory jobs that now account for half this country’s export industry.

Intel and the support companies that are expected to grow up around it represent a chance to make Costa Rica’s capital a more fitting namesake for California’s San Jose--a high-tech hub with a privileged place in the world economy.

“This was the big fish we needed to put ourselves in the major leagues of the electronics industry,” said former Foreign Trade Minister Jose Rossi, the government’s point man on the Intel investment. “This is the beginning of the process of transforming our industry.”

Further, this is a tiny country’s opportunity to preserve a way of life, based on four decades of both political and economic democracy and social welfare, that kept it stable throughout the Central American civil wars of the 1980s.

Sometimes called the Switzerland of Central America, Costa Rica has traditionally been an oasis on an isthmus of poverty, repression and chaos. The country disbanded its army nearly half a century ago and since then has nurtured a culture of peace based on social welfare.

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The government plays an important role in the economy, owning everything from the telephone company to the organization that promotes exports and ensuring that every citizen has access to health care and education.

Nearly three-fourths of Ticos, as people here call themselves, have finished grade school and 11% are college graduates--the highest level of education anywhere in Latin America except perhaps Cuba.

“Costa Rica has invested for decades in our human resources,” said Foreign Trade Minister Jose Manuel Salazar. “These investments have started to bear fruit by making the country a more attractive place for companies like Intel to invest.”

But the government now spends 11% less per Tico on education, health and housing than it did a decade ago, because of reductions in the federal budget. The plummeting prices of traditional exports--coffee, bananas and beef--have cut into tax revenues at the same time the government faces a towering debt to international banks.

To win World Bank and International Monetary Fund restructuring aid for breathing space to pay off its international debt--which peaked at nearly $4 billion, or $1,600 per Tico, the highest of any developing country--the government was forced to reduce spending and cut import tariffs, increasing competition for local companies.

More of the burden for supporting the economy has thus fallen on private enterprise, even as local businesses are facing increased competition. They have not been able to generate the kind of job growth the country needs.

“We need more investment to keep on investing” in health and education, Salazar said.

In response, Costa Rica has been actively seeking foreign investment for several years. The country set up free-trade zones and offered tax exemptions, conditions that have become the price of entry for attracting international corporations.

Foreign companies that owned factories in other Central American countries fled to Costa Rica during the civil wars of the ‘80s. However, many of those investments took the form of assembly plants that provided minimum-wage jobs with long hours--not the kind of work that met Costa Rican expectations.

“There came a point at the beginning of the 1990s that we realized this country was not appropriate for all kinds of companies,” said Danilo Arias, public affairs manager at Intel Costa Rica. “This country simply did not adapt to labor-intensive industries.”

Yet such low-wage industries as textiles and garment making became the country’s main exports. Then, after peace was reached in Nicaragua, El Salvador and, most recently, Guatemala, those industries began leaving Costa Rica for other parts of Central America where wages are lower.

Even so, Costa Rica has reversed its reliance on such traditional exports as coffee, bananas and beef. Today, two-thirds of its exports are cut flowers, manufactured goods such as textiles, and tourism, thanks to the country’s promotion of its rain forests and beaches as “eco-tourism” destinations.

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Costa Rica was hardly the first Latin American country to realize that labor-intensive factories were not providing wage levels and working conditions that would improve people’s lives. Mexico’s border assembly plants did not become a jobs bonanza until the North American Free Trade Agreement began eliminating trade barriers among the United States, Canada and Mexico.

But the Ticos, not a party to NAFTA, had to try a different strategy. They began heavily promoting their political stability and well-educated work force and focusing their attention on attracting high-tech industries, where the growth is.

“We knew the country had conditions to support a major electronics firm, so we set out to catch a big fish,” Rossi said.

Through the Costa Rican investment office in New York, government officials learned that Intel--which supplies the brains for nearly 85% of the world’s personal computers--planned to build a $300-million to $500-million microchip factory and was for the first time considering sites in Latin America.

Though an ambitious factory for Costa Rica, it will be far less sophisticated than the $1-billion-plus chip-making plants Intel has been erecting around the world. The workers here will assemble and test the complex microprocessors made at an advanced logic wafer-fabrication plant now under construction in Fort Worth. The products, which will also be made at a plant being built in Shanghai, will be shipped around the world for installation in personal computers.

Costa Rican officials visited Santa Clara in November 1995. When they found out that company executives had scheduled preliminary visits to Mexico, Brazil and Chile, “we managed to convince them to make a layover in Costa Rica,” Rossi said.

For two days, four Intel vice presidents visited foreign factories in Costa Rica.

“At the end of the visit, they diplomatically told us that while one day they might have something in Costa Rica, their project was too big for Costa Rica right now,” Rossi said.

The Intel complex of four plants was, after all, worth six times the foreign investment Costa Rica normally receives in a year.

“They put us at the bottom of the list,” Rossi said. “They thought that putting their plant in Costa Rica would be putting a whale in a swimming pool.”

Still, Intel told the Costa Ricans they could stay in the race and continue to submit information for the final decision.

Rossi reported the bad news to President Jose Figueres with the suggestion that the government might be shooting too high. The self-confident, enthusiastic president discarded that notion. What was needed, he decided, was a change of strategy.

“Our strategy was that if our perceived disadvantage was size, we had to convert that weakness into a strength,” Rossi recalled.

So Costa Rican officials set out to prove to Intel that a small country can be more efficient and flexible than a large one.

Any information Intel requested was provided immediately, with the result that the company’s analysis of Costa Rica was the first country report finished in its evaluation of prospective sites.

Meanwhile, Figueres took a personal interest. When visiting Intel executives mentioned their interest in seeing Costa Rica’s central valley, Figueres offered to lend them his helicopter if they could be at the presidential hangar at 7:30 the next morning.

“When they arrived at the airport the following morning, the person waiting for them was the president,” recalled Eduardo Alonso, general manager of Foreign Trade Promotion, a quasi-governmental company.

Figueres, who speaks perfect English, also twice visited the Intel microchip plant in Phoenix. The first time, impressed by the executives’ insistence that the company dress be informal, he arrived in shirt sleeves, Alonso recalled. His hosts, in contrast, had donned suits and ties to greet the president.

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After so much effort, it was no surprise that at a reception after November’s announcement of Intel selecting Costa Rica for the plant, Figueres fairly skipped around the room.

“Isn’t it wonderful?” he nearly shouted to a cluster of U.S. diplomats.

“This is an advance in the evolution of the type of [foreign] investment” coming to Costa Rica, Figueres told reporters at a news conference last week. “This is no longer the sort of simple manufacturing that we have been accustomed to in Central America, but more complex manufacturing processes that require us to improve our educational systems and to invest more and better in the training of our people.”

Said Alonso: “The arrival of Intel is a watershed in the economy of Costa Rica because it is an investment based on the foundations that Costa Rica has been developing for the past 50 years.”

Intel executives are equally enthusiastic and eager to prove their company a good corporate citizen. Before beginning construction, they invited archeologists to explore the site for anything of historic value. When the ruins of a small pre-Columbian settlement were uncovered, Intel allowed the team to excavate before bringing in construction equipment.

The decision to invest is only the beginning, Intel executives emphasize.

“We are one-third of the strategy of a new product line,” said Cesar Quiason, president of Intel Costa Rica and a 20-year company veteran. “We are going to be ‘competing’ with [Intel] plants that have been doing electronics manufacturing for 20 years.”

Intel has begun training programs for Costa Ricans at its plant in Phoenix in order to have a core group of technicians prepared when the first module of the four-plant complex opens next year.

For the future work force, professors at the Costa Rica Technological Institute, the country’s top engineering school, spent six weeks in Santa Clara and Phoenix designing an associate-degree program that will allow students to qualify for entry-level positions at Intel.

By offering what amounts to advanced placement for the technical courses offered at some high schools, they can turn out 200 graduates within a year and 400 the next year, said Jose Alberto Diaz, the professor in charge of the program.

It is the first time the institute has worked with a foreign company to design an interdisciplinary degree program to meet the company’s needs--another example of Costa Rican flexibility.

“Intel executives told us they had never found the degree of flexibility they found with us in any other part of the world,” Diaz said.

Still, Intel’s success in Costa Rica will not depend solely on its own workers, Quiason said. The fast-moving computer industry must have reliable suppliers nearby.

“The goal is to find local suppliers,” Quiason said.

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A dozen or more of Intel’s most loyal international suppliers will undoubtedly build their own Costa Rican plants nearby, creating yet more well-paying jobs, Quiason said.

But Intel says that would still leave plenty of opportunity for Costa Rican companies to offer Intel services and components--if they can meet corporate standards for quality and reliability.

No suppliers have announced plans yet to move here .

Once a local supplier is certified as meeting Intel standards, the company can try to compete with other suppliers to provide production for Intel plants worldwide.

That is both Costa Rica’s greatest opportunity and the greatest challenge, said San Jose-based economist Juan Pablo Perez. “The question is whether Costa Rican entrepreneurs are up to it,” he said.

“Traditionally, entrepreneurs here have not been entrepreneurs,” he said. “They have been investors protected by the government. Now whether Costa Rica can take advantage of this opportunity is up to them.”

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Changing Economy

Costa Rica remains dependent on low-wage jobs but has lessened its reliance on exports of coffee, bananas and cattle in favor of textiles, cut flowers and tourism. Exports, by percentage:

1986

Agricultural: 66%

Nonfarm: 34%

1996

Agricultural: 34%

Nonfarm: 66%

Source: Costa Rican government