The Washington Diplomat / October 2000
By Larry Luxner
SAN JOSE, Costa Rica -- In the old days, Central America's economies were so dominated by United Fruit Company and other U.S.-based agribusiness interests that these impoverished countries came to be known as "banana republics."
Today, at least one nation -- Costa Rica -- is on its way to becoming a "microchip republic," thanks to the enormous investments of a single U.S. multinational: Intel Corp.
And no one seems to be complaining very loudly.
"Last year, Costa Rica's GDP grew by 8.3%, and we were 3.8% of that," boasts Danilo Arias, manager of corporate affairs at Intel here. "We are the most visible example of the country's success in attracting foreign investment."
At present, Intel accounts for 8% of Costa Rica's GDP and about 40% of the country's export value. One single silicon chip is worth anywhere between $400 and $800, depending on its configuration, and Intel ships in 25-unit boxes. Last year, said Arias, the company exported over 20 million units worth $2.2 billion -- mainly to the United States and Western Europe.
The rise of the microchip here has been nothing short of dramatic. In 1997, Costa Rica exported $788 million worth of textiles, $560 million in bananas, $391 million in coffee -- and zero in microchips. By 1999, Intel's microchip exports were worth almost twice as much as textiles, bananas and coffee combined.
Eventually, up to 25% of all Pentium chips and other Intel products for PCs worldwide will be assembled in Costa Rica.
That's quite a distinction for a small country known mainly for its volcanoes, rainforests, gourmet coffee and hand-pained oxcarts.
"We wanted to have an operation in Latin America for purposes of risk mitigation and geographical diversity," said the 40-year-old executive, who worked for Costa Rica's investment promotion agency before being snatched up by Intel in December 1996. "After that decision was taken, Intel looked at the three obvious choices: Mexico, Brazil and Chile. Then Costa Rica also came onto the list, and after one year we decided that Costa Rica was the most suitable location."
Among the many factors in Costa Rica's favor: a high literacy rate, skilled workers who speak English, political stability and respect for the rule of law. Says Arias: "It's not complicated to do business in this country. Things are done the way they're supposed to be done."
Since then, the Silicon Valley giant has hired 2,000 employees and poured $400 million into its 52-hectare factory complex just outside San Jose.
"We're very pleased with the course our economy has taken, with the influx of high-tech companies," Costa Rica's ambassador in Washington, Jaime Daremblum, told us. "Costa Rica has been able to reap the benefits of nearly two centuries of putting a priority on education. Companies also feel attracted by the peace and democracy that prevails in my country."
Taking a tour of Intel's operations means going through a rigorous security check at the entrance, donning anti-static gowns, goggles and other protective gear, and passing all handbags and briefcases through an X-ray machine upon leaving to make sure nobody's trying to smuggle valuable microchips out of the factory. Even top Intel officials have to go through this procedure.
Perhaps because Arias was Intel's first employee in Costa Rica, it usually falls upon him to give visitors the official factory tour.
"Our core components and raw materials are manufactured in other Intel sites like Israel, Ireland, Arizona, New Mexico and Oregon," he explained. "We take that core microprocessor and add all the electronic circuitry that will give the component connectivity to a computer. Of the four steps -- fabrication, selection, assembly and testing -- we do the last two here."
Arias said that labor costs represent a relatively small portion of the total cost of microchips.
"If labor costs were such an important consideration, we would have chosen Mexico for the factory," he said. "But we noticed that in Costa Rica, there seemed to be a very high respect for the rule of law and for the way things should be done. I don't think Intel would ever have considered a [U.S.-Mexican] border operation."
Daremblum said that even before Intel, there were smaller high-tech manufacturers in Costa Rica, but "of course, the installation of Intel has encouraged other companies to come."
Lynda Solar, executive director of the Costa Rican-American Chamber of Commerce, says the $29 billion conglomerate, based in Santa Clara, Calif., has hired a lot of qualified local engineers away from other companies -- forcing rival high-tech companies to raise their salaries accordingly.
"We're trying to attract more high-tech into Costa Rica, since we are no longer competitive in low-wage industries with Honduras, Nicaragua, Guatemala or El Salvador." she says. "But not everybody likes the Intel mentality. It's a 24-hour job, and they have a difficult work ethic. You're really married to the company when you work for Intel."
Nevertheless, Intel has attracted a large labor pool of young, English-speaking, college-educated employees well-versed in computers and the Internet. The company plans to have up to 3,500 Costa Ricans on its payroll by 2001, making it by far the largest private employer in the country.
"Every employee receives stock options, computers for their families and three annual bonuses -- two hinged on company performance and one on the performance of the department that employee belongs to," said Arias.
Indeed, among the six Spanish-speaking republics of Central America, Costa Rica appears to be the only one successfully making the transition from coffee, bananas and low-wage apparel manufacturing to a high-tech economy based on industries such as pharmaceuticals, computer software and electronics.
In March, Illinois-based Abbott Laboratories opened its first factory in Costa Rica, a $60 million investment. Costa Rican President Miguel Angel Rodriguez cut the ribbon at the 23,000-square-meter facility, which is located at an industrial park 10 miles west of San Jose and designed to produce pharmaceuticals and hospital supplies.
Not far away, Cincinnati-based Procter & Gamble is building a complex of office buildings that will soon handle all "back-office" functions for P&G's entire operations in North and South America.
"If a retired factory worker form Kentucky has a question on his payroll benefits, he'll call an 800 number and it'll get routed here," says Jack Horvath, general manager for P&G's Global Business Services. "Our employee in Costa Rica will know exactly what to tell him.
Horvath says P&G is investing $60 million in its Costa Rican venture, which in the long run will save the company $100 million a year. The company eventually hopes to have 1,200 college-educated, fully bilingual employees at its four-building office complex.
Yet new investors face problems ranging from government bureaucracy to inadequate telecom infrastructure to a shortage of qualified, English-speaking workers.
A recent survey by the World Bank's Foreign Investment Advisory Service (FIAS) of Costa Rica's university-level technical education programs revealed dropout rates of 35-45% in coursework critical for high-tech professions.
"Up to now, we’ve been meeting our hiring needs, but we have definitely identified that English-language skills are weak in certain key sectors, like accounting and finance," explained P&G's corporate manager here, Randall Chinchilla. "We’ve had to turn down some excellent candidates because they lacked the language skills. We’re compensating by providing English courses for workers in these certain key areas. Without English, growth opportunities within the company are fewer."
Intel's Arias agrees with Chinchilla.
"We’ve been very satisfied with our employees’ professional and technical ability, but we would like to see the school system require total English proficiency for graduation," he said. "The level of English most applicants have is too basic for the duties required by the company. We encourage our workers to improve their English, and have agreements with language schools as a supplement to our training program."
Costa Rica's rush to high-tech has worried some environmentalists, who say the manufacture of silicon chips doesn't jibe with the country's image as an eco-friendly paradise. Yet Arias dismisses such concerns.
"Some professional activists have distorted information about the nature of our operations in Costa Rica. They said we'd create a lot of pollution, and that we'd use tremendous amounts of water," Arias recalled. "But we don't use chemicals in the manufacturing process, nor do we use any water. This is probably one of the cleanest industries in the country."