A Case Study of Foreign Direct Investment

Topics: Costa Rica, Foreign direct investment, Investment Pages: 21 (8069 words) Published: December 2, 2011
A Case Study of Foreign Direct Investment in Central America. The attraction of foreign direct investment (FDI) constitutes a fundamental element to support strategies that aim to achieve sustained economic growth in developing countries. This is because globalization and the attendant opening of the economies to competition require increased financial resources and technology, which would be impossible to obtain under a policy of autarky.1 Though relatively well-established principles exist to explain why a multinational company may decide to move into a specific country, each experience has its idiosyncratic elements from which both theorists and policymakers can learn important lessons. There is less consensus, however, on the potential positive or negative effects that FDI may have on the host economy, and on what factors determine these effects. This chapter presents a case study of foreign direct investment (FDI) going into a small country. It analyzes the advent of Intel, manufacturer of microprocessors, to Costa Rica, a country that is very small indeed when compared with other potential locations for a company of that nature. The literature on FDI contains theoretical formulations on the factors that attract FDI and on policies oriented towards increasing FDI flows to a country. 2 There are also models of the effects that such investment has on the host country at both the micro- and macroeconomic levels. Recent attempts to use cross-country data to analyze. the determinants of FDI have faced identification problems, though researchers have managed to provide good insights on the issue. The theoretical literature also highlights the impact of FDI on the development of the host country through technological spillovers and the increased availability of new inputs to both the multinational firm and to other local firms This chapter studies the impact on the Costa Rican economy of Intel’s decision to move into that country in 1997. We use indicators of both direct effects and selected fiscal and macroeconomic effects as evidence; sometimes, however, these indicators are more qualitative than quantitative, due to the shortage of systematically collected data. We also examine training externalities, as well as the “signaling” effect that Intel has had on other firms’ decision to invest in Costa Rica, thus making Intel itself into a factor of attraction. Costa Rican economy has had to overcome to be more effective in attracting FDI, this is an important part of the discussion that follows, as is the fact that large FDI firms like Intel may help bring about needed institutional reforms by influencing the political balance through a new arrangement of stakeholders. The chapter starts by examining the rationale behind Intel’s decision to move to Costa Rica, and the main obstacles it faced. The next section reviews the literature on the effects of FDI on the host economies. This is followed by a survey of the indicators that measure the effects of Intel’s arrival on the economy. We first look at some partial equilibrium indicators—gross income generated, not at shadow prices—and then, discuss potential general equilibrium consequences, such as the pressure on prices in the inputs market. For this purpose, we detail the findings of a short survey we carried out in Costa Rica. We then describe a number of potential training externalities and linkages, also showing data from a survey to Intel suppliers. The chapter closes with some general conclusions.

2. The Decision Process and Its Rationale: Intel Chooses Costa Rica A firm invests abroad either to exploit a foreign market (as have several companies that invested in Ireland to gain better access to the European Union) or to secure better access to certain inputs, especially cheap labor. This second motive is typical of FDI in small and poor countries, and certainly influenced Intel´s decision to invest in a microprocessor plant in Costa Rica...
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