The Impact of Intel in Costa Rica

The Impact of Intel in Costa Rica Nine Yeas Afte the Decision to Invest Investing in Development Seies Multilateal Investment Guaantee Agency 2006

Copyight 2006 The Wold Bank Goup/MIGA 1818 H Steet, NW Washington, DC 20433 All ights eseved Manufactued in the United States of Ameica May 2006 Available online at www.ipanet.net/investing_in_development/intelc Fo moe infomation, contact: MIGA Opeations 1818 H Steet, NW Washington, DC 20433 t. 202.458.9505 f. 202.522.2650 www.miga.og The mateial in this publication is copyighted. Requests fo pemission to epoduce potions of it should be sent to MIGA at the addess above. Cove photo coutesy of Intel Costa Rica The Multilateal Investment Guaantee Agency (MIGA) of the Wold Bank Goup was established in 1988 to pomote the flow of pivate foeign investment to developing membe counties. MIGA offes political isk insuance coveage to eligible investos fo qualified investments in developing membe counties. MIGA also offes technical assistance pogams to develop and implement effective stategies fo attacting and etaining foeign diect investment. This hands-on technical assistance focuses on thee pimay aeas: dissemination of infomation on investment oppotunities and business opeating conditions in developing membe counties though online sevices; capacity building of the oganizations and institutions involved in the pomotion of foeign investment; and, investment facilitation activities suppoting the effots of developing counties to identify and attact investment. Amando Heilbon, Pesident of Infinitum, a consulting fim based in Costa Rica that specializes in foeign diect investment, conducted eseach and pepaed the initial epot that was the basis fo this publication. Duing the time of Intel s initial investment in Costa Rica, M. Heilbon was CINDE s Investment Pomotion Diecto fo the United States.

The Impact of Intel in Costa Rica Nine Yeas Afte the Decision to Invest Investing in Development Seies Multilateal Investment Guaantee Agency 2006

Acknowledgements This publication was made possible though the contibutions of many people who geneously shaed thei pespectives and insights: Bill Abaham (Geneal Manage, Intel Costa Rica); Julio Acosta (fome Managing Diecto, CINDE); Danilo Aias (fome Investment Manage, CINDE and fome Copoate Affais Diecto, Intel Costa Rica); Robeto Atavia (Dean, INCAE); Atuo Baboza (Copoate Affais Manage, Intel Costa Rica); William Calvo (Diecto of the Economics Section, Cental Bank of Costa Rica); F. Tomás Dueñas (fome Pesident of CINDE, fome Ministe of Foeign Tade and cuent Costa Rican Ambassado to the United States); Mike Edwads (fome Global Pogam Diecto, Site Selection & Development, Intel Copoation); Lucia Goss (Senio Investment Coodinato fo Electonics, CINDE); Eduado Lizano (fome Pesident, Cental Bank of Costa Rica); Gabiela Llobet (Copoate Affais Diecto, Intel Costa Rica); and Eduado Sibaja (fome Ministe of Science and Technology and fome Diecto of CENAT). This epot is intended to stimulate discussion and leaning egading investment pomotion agencies and thei pactices. It is not meant to povide a complete o compehensive case histoy, but athe to highlight elements elevant to investment pomotion. The Multilateal Investment Guaantee Agency is not, by means of this publication, endeing accounting, business, financial, investment, legal, tax, site selection, o othe pofessional advice o sevices, and shall not be esponsible fo any loss sustained by any peson, company o oganization that elies on this publication as a substitute fo such pofessional advice o sevices. Befoe making any decision o taking any action that may affect you business, you should consult a qualified pofessional adviso.

Table of Contents Intoduction...5 I. Afte the Intel Investment...7 The Poject Evolves...7 Leveaging the Oppotunity...8 II. Post-Investment Impacts...13 Macoeconomic Impacts...13 The Investment Climate...17 Costa Rican Industy...20 Developmental and Social Impacts...22 III. Conclusions...25 Sizing Up the Impact...25 Challenges and Next Steps...27 Lessons...29 Questions fo Discussion...31 Endnotes...32 Appendices...35 1. Aconyms and Abbeviations...36 2. The Decision to Invest: A Synopsis of Attacting High Technology Investment Intel s Costa Rican Plant Case Study...37 3. Summay Recommendations...44 4. Intel in Sichuan Povince, China...46 5. Souces of Infomation...47 www.miga.og...50

Intoduction Since Intel s decision to invest in Costa Rica in 1996, the case of the global electonics giant choosing the tiny county to locate its US$300 million semiconducto assembly and test (A&T) plant has been widely ecounted in the field of investment pomotion. A seemingly unlikely match, it is now known that Costa Rica identified a close fit with Intel though meticulous eseach, and then demonstated with pecision how the county s investment climate would adapt to meet the poject s equiements. This was accomplished with the active involvement of the highest levels of govenment in a shot timefame against an impessive list of competitive locations. Yet how and why Intel selected Costa Rica is eally only the beginning of a evealing case histoy of both lead playes competing in a dynamic and difficult global envionment. Nine yeas afte the initial poject was announced, hindsight affods a fesh pespective on Intel Costa Rica and its numeous impacts, many of which wee unexpected. Beyond its obvious diect effects on the county s economy in tems of goss domestic poduct (GDP), foeign diect investment (FDI), and tade gowth, Intel s investment decision was the catalyst fo a ealignment of Costa Rica s competitive platfom as an investment location. Costa Rica woked esoucefully and with a novel sense of ugency to enhance the county s technical education, incentives law, egulation, and infastuctue. Ove time the effects could be seen in an impoved investment climate, a moe focused, stategic appoach to investment pomotion, a developing technology cluste, and newly secued FDI pojects in othe tageted sectos. The Intel investment also eached fa into the local community, affecting education and the county s knowledge base, wokplace standads and business cultue. This epot focuses on the post-investment yeas by tacing a seies of impacts, diectly and indiectly attibutable to the intoduction of Intel in Costa Rica. As the lagest pivate poject in Costa Rica on ecod, the Intel investment had a pofound impact. Yet its example is as elevant in demonstating Costa Rica s successful appoach to secuing an individual poject and sustaining momentum in gowing the electonics cluste and othe FDI as in its scale. This publication is oganized in thee main sections, along with seveal appendices. To povide context since Intel s announcement in late 1996, the fist section biefly summaizes the poject s evolution and Costa Rica s investment pomotion stategy and appoach following the investment. The second section focuses on the impacts themselves, which although lagely inteelated, have been gouped as follows: those evidenced in Costa Rica s economy; investment climate; industy; and finally, in the development of Costa Rican society, such as in education. Finally, the thid section pesents conclusions, a commentay dawn fom vaious pespectives and a look at challenges Costa Rica faces as it moves fowad in its effots to incease FDI. A synopsis of the 1998 pape on Intel s initial decision to invest, Attacting High Technology Investment: Intel s Costa Rican Plant, published by the Foeign Investment Advisoy Sevice (FIAS) of the Intenational Finance Copoation/Wold Bank Goup, appeas as Appendix 2. (A complete copy of the FIAS study can be odeed at http://publications.woldbank.og/ecommece.)

I. Afte the Intel Investment The 1996 announcement by Intel, the wold s lagest semiconducto company, that it would constuct a new US$300 million assembly and test plant in Costa Rica aoused consideable inteest in the foeign investo community. With annual evenues of moe than US$20 billion, Intel s goss sales wee appoaching two times the GDP of tiny Costa Rica, which had a population of only 3.5 million. Intel s plan called fo the establishment of a campus that could accommodate up to fou plants employing 3,500 ove time, eventually eaching an estimated US$500 million in total investment. The Intel investment immediately set into motion a couse of action at the highest levels of govenment and within CINDE 1, the investment pomotion agency, which would help define a new stategy and modus opeandi in woking with investos. The Poject Evolves The stat of constuction on an A&T plant in Apil 1997 maked the poject s fist majo milestone, and validation that Intel was satisfied with Costa Rica s pogess on outstanding issues elated to the investment climate. Intel s initial US$300 million, geenfield investment in Costa Rica established the 52-hectae campus fo the testing and assembly of Intel s poducts. The poject equied an estimated 2,000 employees in two plants. 2 Ove the couse of the next seveal yeas, Intel built the second plant, and announced an expansion investment in ode to intoduce a new poduct platfom. In 2003, six yeas afte the fist plant opened, Intel s volume of poducts assembled and tested in Costa Rica epesented about 22 to 25% of the copoation s total sales. By 2005, when Intel invested US$260 million in expansions to include a thid building and new sevices in its shaed sevices goup, the Costa Rica campus eflected an accumulated investment of US$770 million, employment fo 2,900 wokes and an additional 2,000 indiect jobs. Assembly and Test Opeations In Octobe 2003, Intel announced it would invest appoximately US$110 million in a thid A&T line fo chipsets, adding 600 moe employees ove the couse of two yeas. The opeation in Costa Rica now constitutes about half of Intel s initially planned assembly and test configuation, 3 including two plants and a distibution cente. The plants assemble and test thee poduct platfoms: seve micopocessos, such as Intel Xeon Pocessos; desktop cental pocessing units (CPUs), such as Intel Pentium 4 Pocessos; and chipsets, 4 initiated in June 2004. The thid poduct line was engineeed within an existing facility, and is identical in all dimensions to siste chipset A&T opeations in Malaysia and China. Chipsets ae consideed a value-added, moe advanced technology poduct. Accoding to Bill Abaham, Intel Costa Rica s Geneal Manage, assembling and testing chipsets is vey positive fo Costa Rica, because it inceases the stategic impotance of

the plant in Costa Rica fo the Intel Copoation. We hope that Costa Rica continues making effots to maintain and incease its competitiveness as suppot to this type of decision (to invest). Intel Costa Rica as a Fee Zone Investo The Intel Costa Rica campus was set up as its own fee zone because it was too lage to locate within one of the existing industial paks. Costa Rica s Fee Zone law was evised to include establishment outside of a Fee Zone Pak and a e-investment benefit. As a fee zone investo, Intel eceived Costa Rica s standad investment incentives and tax policies, including: 100% exemption on impot duties on aw mateials, components and capital goods 100% exemption on taxes on pofits fo eight yeas, and 50% on the following fou yeas 100% exemption on expot taxes, local sales and excise taxes, and taxes on pofit epatiation 100% exemption on municipal and capital taxes No estictions on capital epatiation o foeign cuency management Fully expedited on-site customs cleaance Ability to sell to expotes within Costa Rica Ability to sell up to 40% in the local maket with exemption fom sales tax Souce: FIAS Occasional Pape 11, 1998 Gulza Mohd Ali, Intel VP and A&T Geneal Manage, quoted in a 2003 pess announcement, said that the additional investment "confims the confidence that Intel Copoation has in the ability of the Intel Costa Rica team (and is) also a signal that the company wants to continue developing key poducts in Costa Rica." Intel s site selection expet, Mike Edwads, explains that by Intel s standads, the Costa Rican campus is a young opeation with a development plan influenced by two undelying tends in the industy: the staggeing pace of shote poduct cycles and highe technology density, o impovements in poducts and pocesses that move the poduction line up the technology cuve, paticulaly in tems of miniatuization, efficiency, speed and automation. Unde these two paallel dives, the size of the physical plant and the numbe of employees can emain about the same, even as investment inceases. Accoding to Edwads, 18-month poduct cycles foce Intel to continually econfigue lines and efesh equipment. As a esult, new Intel A&T campuses can epesent investments of up to US$1 billion. Given favoable global makets and county conditions, a simila level of total investment in Costa Rica is consideed possible. Sevice Opeations and Ventues In 2000, Intel Costa Rica also expanded into sevices with its Latin Ameica Engineeing Sevices (LAES) Goup, incopoating ove 100 enginees poviding global engineeing suppot in cicuit design and validation, and about 40 enginees ceating enabling code fo micopocessos. The addition of a financial sevices goup in 2004 maked a milestone in tems of poviding sevices fo the copoation out of Costa Rica. Intel Costa Rica ecently added pocuement and technical assistance to expand the sevices unit, now compising five aeas collectively efeed to as the shaed sevices goup. In addition, Intel Capital fo Latin Ameica, a one-peson ventue located at Intel Costa Rica, is chaged with finding and suppoting technology companies that complement Intel. Intel Capital has invested in two softwae development companies located in Costa Rica. Leveaging the Oppotunity Aguably, the most immediate stategic impact that Intel bought to Costa Rica was a significantly bette county image fo FDI. Intel had given an implicit seal of appoval to Costa Rica s opeating envionment. The endosement of one of the most espected and emulated copoations in the wold and an undisputed leade in technology caused othe pospective investos to take notice. CINDE, the county s official investment pomotion agency, set out to leveage this inteest into a boade stategy that would attact additional FDI and advance the county s competitiveness as a location.

The Signaling Effect The signaling effect is well ecognized and appeciated by investing companies. Intel had conducted in-depth due diligence befoe choosing a new location, thus paving the way fo othe investos to follow the copoation s lead. The news that Intel had decided in favo of Costa Rica made intenational headlines 5 and immediately put Costa Rica on the site maps of companies aound the wold in technology and othe sectos. With the Intel announcement, the Costa Rican media began to focus coveage on foeign investment mattes, featuing Intel, othe specific investos and pojects, and oveall FDI and expots. The inceased flow of infomation geneated by the media helped establish the impotance and benefits of FDI in a county like Costa Rica. 6 Speading the wod. CINDE, Costa Rica s Ministe of Foeign Tade, José Rossi, and Pesident José Maía Figuees wee well awae of the powe inheent in Intel s signal, and immediately began leveaging the message. In a vey shot time, CINDE attacted the attention of top technology companies that peviously had not been vey eceptive to the agency s ovetues. These pospective investos now exhibited moe confidence about pospects in the county, accepting offes of county pesentations and exploatoy site visits, and making down payments fo land. Intel coopeated with CINDE to become a live testimonial, meeting with potential investos as they woked though thei decision-making pocesses. Fo example, both Abbott Laboatoies (now Hospia) and Pocte & Gamble (P&G) obtained validation fom Intel and late decided to also establish opeations in Costa Rica. (See Box 1: Govenment and Investo Suppot.) High-level integation between govenment agencies and CINDE Since 1997, the Ministy of Foeign Tade (COMEX) has woked closely with CINDE fo FDI attaction and with PROCOMER fo expot pomotion. A sign of integation is the exchange of top executives between COMEX and CINDE. Ministe of Foeign Tade José Rossi has been CINDE s Pesident fo seveal yeas. Two-tem Pesident of CINDE, F. Tomás Dueñas, also has been the Ministe of Foeign Tade. Box 1 Govenment and Investo Suppot In the fou yeas between 1997 and 2000, a stong woking elationship was foged between foeign investos, CINDE and the govenment. A pivate-public secto team the Pesident, elevant ministes, top executives of established investos and CINDE jointly pomoted the county fo investment. This cohesion was not only visible within the county, but also aboad. Established investos, such as Intel, Baxte, Conai, Sawtek, Bouns, and late Abbott Laboatoies (now Hospia), Westen Union, P&G and Sykes, publicly endosed the county in oad shows acoss the United States. The Pesident s involvement and live testimony fom these companies conveyed a message of stong involvement and investo satisfaction. Intel actively paticipated in many pomotional events as a signatue poject (that was) woking and successful, accoding to Intel s Edwads. Pesident Figuees, and late Pesident Miguel Ángel Rodíguez, embaced the concept of outeach, pesonally paticipating as keynote speakes in one o moe events CINDE oganized aboad each yea. In 1999 CINDE gatheed top CEOs, including Caig Baett of Intel, at a gala dinne to pesent the case fo Costa Rica befoe potential investos in the Silicon Valley. In 1998, when Pesident Figuees tuned the powe to incoming Pesident Rodíguez, high-anking executives fom foeign companies wee fomally invited to the ceemony.

Technology Cluste Focus The attaction of FDI and an oientation towad high technology companies, paticulaly elated to a cluste stategy, became national pioities fo the emainde of the Figuees administation (1997-1998). Impotant links wee foged between Havad Business School, INCAE (the Costa Rican business school), CINDE and the govenment to detemine the best way to fully leveage the unique oppotunity pesented by Intel to a new level of highe value added and FDI competitiveness. Pesident Figuees and enowned business stategist Michael Pote, the pionee of cluste development theoy, met seveal times on the subject, and a pomotional appoach was designed with the help of seveal think tanks in Costa Rica and guidance fom Pote. An examination of Costa Rica s national development stategy and its focus on high technology was necessay fo seveal easons elated to the oveall economic pictue. Afte a stagnant 1996, FDI and expots wee seen as moe citical to the health of the economy, especially when the domestic maket was soft. The county was losing its advantage in appael manufactuing, peviously a leading expot industy, and coffee and banana pices wee tumbling in a fee fall. Duing this peiod, the Pesident of the Cental Bank, Eduado Lizano, identified FDI as a key catalyst fo evitalizing the economy. Attacting big fish. CINDE s pomotional effots in 1996-1998 pimaily focused on the electonics secto: establishing and consolidating Intel, developing the cluste by attacting moe high-tech companies and stengthening the suppot industy aound them. In this pocess, Intel VP Bob Pelman advised CINDE to pusue othe big fish to the pond, following the example of Ieland, and offeed intoductions to key contacts that led to futhe investment. In 1998, CINDE focused on einfocing the electonics cluste by binging supplies fo the suppot industy, not only fo Intel, but also fo all lage investos established in the county. The high-tech focus also pompted CINDE to open its foeign office in the Silicon Valley in 2000, although when funds deceased the agency was foced to close both its offshoe offices in 2004. Supplie Development In light of the govenment s inteest in economic clustes in 1997-1998, Costa Rican officials, led by Pesident Figuees, visited Singapoe, Malaysia, the Philippines and Japan, and leaned about the Local Industy Upgade (LIU) pogams in these counties. A local supplie base was seen as a means to incease economic impact though the multiplie effect, while also helping to ancho foeign investos though tighte and moe poximate supplie elationships. In Costa Rica, Baxte Healthcae had been sponsoing a simila supplie pogam, inspied by the Singapoe Economic Development Boad s local industy pogam. Costa Rica PROVEE, a evamped pogam to help develop local supplies, was fomally launched in 2000. This was the esult of joint effots by seveal oganizations, including CINDE, the Chambe of Industy, PROCOMER (the Foeign Tade Copoation of Costa Rica), the Ministy of Science and Technology (MICIT), paticipating companies such as Baxte, and the Inte-Ameican Development Bank, which funded 50% of the cost of the pogam with a non-efundable loan. Costa Rica PROVEE has achieved moe than 40 viable linkages of local supplies with multinational copoations (MNCs), and continues as a woking pogam unde PROCOMER. 10

Secto Divesification Duing 1997 and 1998, the slump in the electonics industy and Asia s financial cisis spaked a ealization in Costa Rica that eliance on one fast-gowing and pomising secto could be isky in a volatile envionment. Most of CINDE s top pospects fo high technology pojects evapoated, as did the possibility of landing anothe top MNC in electonics. Fotunately, CINDE had stated moving in 1997 towad a moe divesified investment pomotion stategy afte seeing indications of an impending cisis in 1996. This stategy tageted sectos that wee showing steady, athe than explosive gowth, including the medical devices industy and call centes. To date, this divesification has helped CINDE weathe downtuns in electonics investment and expots. CINDE has been able to attact impotant ancho investos in the counte-cyclical medical secto, including Abbott Box 2 Post-Investment Cae and Policy Advocacy The team that speaheaded the county s follow-though on commitments made to Intel duing the conditional contact peiod evolved to become the govenment s Steeing Committee fo policy advocacy and implementation of necessay impovements in the investment climate. In addition to the Local Industy Upgade pogam (initially called MIL, and late Costa Rica PROVEE), two impotant initiatives wee diected at the inceasing base of installed investos. High-Technology Multinational Companies Committee. To help balance the needs of new and existing technology investos, CINDE and the govenment ceated a pivate-public secto committee to help channel feedback fom existing investos. Led by Pesident Figuees, the Committee met once a month in the Pesidential House to discuss the needs fo impovement in the opeating envionment. Established investos, such as Intel, Motoola, Baxte Healthcae and Conai pesented thei concens. Commitments made at these meetings wee immediately enteed as tasks fo the Steeing Committee to execute. CINDE s Investment Executives and the Post-Establishment Coodinato. As a esult of the successful Intel expeience and an inceased potfolio of expansion pojects einvestments came to epesent half of total FDI flows CINDE ceated the position of Post-Establishment Coodinato in 2000 to augment the effots of its team of account executives. A county and its IPA cannot just attact a foeign investo and leave it alone, Julio Acosta, CINDE s Managing Diecto at that time, said of the pogam. They have to povide aftecae in ode fo investos to pospe and become spokespeople in favo of the county. The executives esponsible fo individual investo elationships, called Investment Executives, met egulaly with established investos, taking note of thei needs, and channeling thei issues to the new coodinato in chage of aftecae sevices. This position was also esponsible fo policy advocacy, lobbying the govenment fo the continuous impovement of the opeating envionment, helping to ensue investo satisfaction, collaboation with othe investos, and einvestments. 11

Laboatoies (now Hospia) and Boston Scientific, while helping expand Baxte s existing opeations. (See also Box 2: Post-Investment Cae and Policy Advocacy.) In its newly tageted sectos, CINDE set out to eplicate the signaling effect spued by Intel. The agency leaned that like Intel, thee wee leading MNCs in othe sectos that wee watched fo the signals thei decisions sent to industy pees and the est of the copoate wold. CINDE s stategy futhe expanded to include mid-to-high-end sevices in its tageted sectos. Subsequently, the agency landed Westen Union s technical suppot cente, P&G s shaed sevices back office, Sykes call cente fo hie and Teadyne s efubishing cente, among othes. It was P&G s decision that acted as the signal that helped boost development of the sevices secto in Costa Rica. 12

II. Post-Investment Impacts Befoe the decision to invest was made, Intel in Costa Rica was compaed to a whale in a swimming pool, 7 a efeence that speaks to both elative size, anticipated impact and likely ipples (o waves) acoss seveal dimensions of Costa Rica s economy and society. Fo puposes of this discussion, Costa Rica was affected in fou main aeas: its economy, o moe specifically, in its FDI inflows, GDP and tade; its investment climate; its industy; and among aspects of its development and society, such as education. Macoeconomic Impacts Dubbed the Intel effect, the dispopotionately lage Intel poject elative to the small Costa Rican economy almost immediately ceated distotions in the county s macoeconomic indicatos. These distotions became appaent soon afte Intel began opeating and expoting in 1998. Economists began to measue the economy with and without Intel, in ode to undestand the tends of the othe Costa Rica. This sot of analysis late evolved to dual sets of macoeconomic statistics fo Costa Rica, both with and without high technology multinational companies in geneal, including Intel. Table 1 FDI Gowth in Costa Rica 1995-2004 (US$ millions) 1995 336.9 1996 426.9 1997 406.9 1998 611.7 1999 619.5 2000 408.6 2001 453.6 2002 661.9 2003 576.7 2004 585.0 Figue 1 FDI Flows in Costa Rica, 1984-2004 (US$ millions) Souces: Cental Bank of Costa Rica, COMEX, PROCOMER, ICT, CINDE 700 600 500 400 300 200 100 84 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 Souces: Cental Bank of Costa Rica, COMEX, PROCOMER, ICT, CINDE 8000 7000 Total impots 13

Foeign Diect Investment Table 2 Costa Rica s GDP and GDP pe Capita, 1995-2003 (Maket pices) GDP (US$ millions) GDP pe Capita (US$) 1995 11,722 3,378 1996 11,843 3,322 1997 12,812 3,508 1998 14,096 3,762 1999 15,797 4,116 2000 15,946 4,062 2001 16,394 4,090 2002 16,818 4,112 2003 17,429 4,180 A apid and damatic impact was on foeign diect investment into Costa Rica. Intel investment inflows stated in 1997 and skyocketed in 1998 and 1999. (See Figue 1.) As Table 1 shows, in 1998 and 1999 Costa Rica eceived moe than US$600 million in new FDI, an incease of about 50% ove the aveage in 1996-1997. Though 2004, Intel had invested moe than US$510 million, including its e-investment of US$110 million in the A&T line fo chipsets. This poject helped to boost total FDI flows in 2004 to US$585 million. The Intel effect on the county s FDI inflows has enabled Costa Rica to weathe the economic downtun in the egion much bette than othe counties in Latin Ameica, falling just 7% compaed to the egional aveage of 55% between 1999 and 2003. Goss Domestic Poduct The county s goss domestic poduct has also been intinsically tied to Intel. As shown in Table 2, GDP and GDP pe capita suged in 1997 though 1999. In 1999, Costa Rica s GDP gew 8.4%, but excluding Intel s contibution, it would have gown only 3%. Thus, moe than 60% of GDP gowth in 1999 could be diectly attibuted to Intel. (See Table 3.) Howeve, Costa Rica s GDP also shaed Intel s downtuns. When Intel activity dopped significantly in 2000, the county s GDP gowth was held to just 1.4%. Without Intel, GDP would have gown 3%. This expeience led to the ealization in Costa Rica that companies such as Intel wee subject to sevee cycles, and consequently, the county needed to divesify its investment pojects in othe companies, sectos and makets. In 2002 and 2003 Intel caused little o no distotion in GDP gowth, basically moving with the est of the economy. Souce: Cental Bank of Costa Rica Table 3 Gowth of Selected Indicatos (%) 1999 2000 2001 Total w/o Intel Total w/o Intel Total w/o Intel GDP eal 8.4 3.0 1.4 3.0 4.6 4.1 Expots 20.6 3.3-11.2 4.3 5.6 2.5 Impots 1.9 NA 1.4 3.8 5.0 5.5 Souces: Econanálisis; What the Intel effect is all about," Actualidad Económica, 2001. 14

Tade Both impots and expots gew vigoously in 1997 and 1998, eflecting the high level of fee zone activity. Duing those yeas, Intel s impots of plant equipment and high-value intemediate mateials boosted oveall gowth in impots. Even befoe Intel stated to opeate in a fee zone, expots wee expeiencing stong momentum, as shown in Figue 2 and Table 4. Fom golden bean to golden chip. Fee zone expots in 1996-1997 supassed bananas and coffee, Costa Rica s taditional expot leades. In subsequent yeas, Intel stated expoting at volumes peviously unknown in Costa Rica. Fo example, duing 1999, Intel expoted about US$2.4 billion in poducts, amounting to 36% of the county s total expots. Costa Rica s total expots eached US$6.6 billion, an unsupassed ecod to date. Fee zone expots skyocketed. Intel apidly became the top expoting company, its chips became the top expot, and electonic components became the top expot categoy, leaving agicultual and ago-industial poducts and appael fa behind. Duing 1998, modula cicuits (electonics) supassed the taditional top expots, such as bananas and coffee. Intel and othe fee 700 zone expotes of non-taditional poducts helped evese the dop in the county s 600 tems of tade that had esulted fom deceasing intenational pices fo taditional poducts. 500Intel added new expot makets, such as Taiwan and Singapoe, and futhe developed expot makets such as Mexico. 400 Costa Rica s economy has evolved fom poduction of its golden bean (highquality coffee) 300 to the golden chip. To futhe illustate this damatic shift in the composition of Costa Rican expots: thity yeas ago taditional coffee and bananas epesented 200 80% of expots, and today, non-taditional expots epesent 80%. In 1985, Costa Rican expots amounted to just ove US$1 billion, of which 60% 100 Table 4 Annual Total Impots and Expots in Costa Rica (US$ millions) Impots Expots 1995 4,089 3,476 1996 4,327 3,758 1997 4,970 4,205 1998 6,239 5,526 1999 6,355 6,662 2000 6,389 5,850 2001 6,569 5,021 2002 7,188 5,263 2003 7,663 6,102 Souce: Cental Bank of Costa Rica, Customs, PROCOMER Figue 2 Annual Total Impots and Expots, 1995-2003 (US$ millions) 84 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 8000 7000 Total impots 6000 5000 Total expots 4000 3000 95 96 97 98 99 00 01 02 03 Souces: Cental Bank of Costa Rica, Customs, Expot Pomotion PROCOMER 15

wee peishable poducts. By 2003, expots had gown by almost five times, with a moe divesified basket of poducts. Peishable poducts had fallen behind the new leade, electic and electonic poducts, epesenting 28% of the total. (See Figue 3.) Figue 3 Costa Rican Expot Composition 1985 2003 24% Peishable poducts 60% Peishable poducts 3% Electic and electonic 10% Textiles 6% Pecision, plastic, medical 7% Food poducts 14% Othe 28% Electic and electonic 13% Textiles 10% Pecision, plastic, medical 8% Food poducts 17% Othe Riding the Intel wave. Beginning in Febuay 1999, and fo moe than a yea, Costa Rica ecoded a tade suplus fo the fist time in 20 yeas. Costa Rica became the numbe one pe capita expote in Latin Ameica. Howeve, when intenational business conditions softened, Intel s expots fell to US$600-800 million pe yea in 2000, 2001 and 2002. Duing this peiod, Intel s impots in one yea exceeded its expots, inceasing Costa Rica s tade deficit. This occued duing difficult intenational conditions, when expots wee lagging and Intel Costa Rica was impoting new, costly equipment to etool its facilities. In ecent yeas, Intel expots have aveaged US$1-1.4 billion pe yea, epesenting 17 to 20% of total expots of the county. 8 Intel s Value Added Ove the yeas, Intel s value-added has been estimated in the ange of US$90-500 million pe yea, based on thee diffeent types of calculations: (1) as a pecentage of the value of Intel s total expots; (2) as the diffeence between the value of Intel s expots and impots; and (3) as the amount Intel pays employees and local supplies. As a pecentage of expots, Intel s annual value added is estimated at 18 to 20%, o about US$260 million in 2005 and nealy US$500 million at its high point in 1999. Othe calculations yield an Intel suplus of US$200 million, the diffeence between US$1.5 billion in expots and US$1.3 billion in impots. 9 The US$200 million diffeence could be infeed as eal expenses incued in Costa Rica, o Intel s national income effect. Even in 2000, when expots dopped, this effect was estimated at the same level. On the low side, based on employee and supplie payments, the Intel value-added has been estimated at US$90-200 million pe yea. Souces: Cental Bank of Costa Rica, CINDE Diect employment. Intel Costa Rica now employs 2,900 diect wokes, but between 1999 and 2004, it maintained an aveage of about 2,000. A ough estimate is that Intel paid US$44 million in goss payoll in 2005, including base salay, social secuity contibutions and wokes compensation insuance. These jobs ae 50% bette paid than taditional appael o ago-industial, and offe ecent technical gaduates a pivate-secto job altenative. Befoe the advent of Intel and the development of the electonics cluste in Costa Rica, electical and electonic enginees and technicians essentially had one caee option: to wok fo ICE, the state-owned powe and telecommunications povide. Backwad linkages and local puchases. Intel estimates it geneates anothe 2,000 indiect jobs though its puchases fom domestic supplies. While locally acquied diect mateials ae only 2% of the total value Intel expots, when a boade ange of goods and sevices 10 is consideed, supplie puchases ae estimated at 10 to 12% of expots. Intel s local puchases fo goods and sevices vay by yea in the ange of US$50-150 million. 11 Belen community. Intel is located in Belen County, Heedia, one of the most developed counties in Costa Rica, and seat of one of the county s wealthiest municipalities, Belen. Belen County alone geneates 25% of the county s expots. About 50% of the county s hefty budget comes fom patents and eal estate taxes 16

paid by local industy. In 1999 Intel voluntaily began paying patent fees to the county govenment, despite the copoation s exempt status unde the fee zone egime. Intel s choice of locating in Belen has tansfomed the county into the epicente of Costa Rica s infastuctue coido. In addition to Intel, Belen County hosts 87 copoate opeations including well-known multinationals Kaft Foods, Kimbely Clak, and Fiestone and foms pat of thee impotant coss-county clustes in electonics, medical devices and call centes. 12 The Investment Climate Befoe the poject in Costa Rica was announced, Intel s Pelman, VP of Intenational Tax and Licensing, povided his assessment of the county s investment climate: Costa Rica is a good poduct, he said. It has seveal geen lights, some yellow lights and no ed lights. Intel, a sophisticated investo, consideed the county s investment climate sufficient fo the copoation to establish a new opeation in Costa Rica. Howeve, the announcement in Novembe 1996 was conditional, a usual pactice of Intel; the investment would mateialize only if Costa Rica deliveed on cetain povisions between Novembe 1996 and Mach 1997. Both CINDE and the govenment wanted to effectively land Intel, but they did not have much time to make the necessay impovements in the investment climate. They needed to oganize the task at hand, execute in an unusually fast and esouceful manne, and wok diligently to tun the yellow lights into geen. 13 The esults of thei effots to impove the investment climate its infastuctue, incentives, business pocesses would become a legacy available to all foeign and domestic investos in Costa Rica. 14 Impoving the Investment Climate The conditional contact with Intel stipulated specific impovements that pompted immediate govenment action, pimaily in fou main aeas: technical education and wokfoce skills, infastuctue and suppot industy, pemits and constuction, and tax and incentives. The two examples of logistics and communications infastuctue and constuction pemits illustate a few of the many facets of impotant investment climate factos that Costa Rica addessed. In paticula, these effots would help contibute towad the county s simple, moe tanspaent pocedues and egulatoy system. (See Box 3: Enhancements in Costa Rica s Investment Climate.) Logistics and communications infastuctue. Intel s immediate impact on Costa Rica s logistics and communications infastuctue povided an impetus fo futhe development and exponential gowth in these industies. In the seven yeas between 1996 and 2003, communications and logistics spending in Costa Rica nealy doubled, achieving an aveage annual compound ate of gowth of about 10%. In 1998, the govenment passed the Public Concessions Law allowing pivate investos, national and foeign, to paticipate in the constuction and opeation of public woks, such as oads and pots. The upgaded, wold-class aipot fo passenges and cago, while still unde constuction and emodeling, has impoved facilities and logistics fo passenges and cago, with highe fequency of flights and the local establishment of leading intenational sevice povides, such as FedEx, UPS, DHL, Danzas and AIG. Faste aipot customs pocedues, using the Intenet, wee also established to allow fo a 24-hou maximum lead-time. 17

Costa Rica also impoved the quality of the county s powe infastuctue, as a esult of the installation of new equipment and techniques shaed by Intel with powe supplie ICE. A pivate-public patneship between Intel and ICE was ceated to jointly manage and supevise the new Belen substation, which was built by ICE with Intel financing on Intel s land. In addition, a discounted, high tension ate was ceated fo high consumption uses of hydoelectic powe. Pemits and constuction. A steamlined pemitting pocess allowing fo paallel pemitting and constuction was necessay to accommodate Intel s equiements fo the poject s constuction. At fist, both the govenment and pivate constuction companies thought it was impossible to build Intel s facility to the equested specifications and timing. Such a poject typically equied two yeas to build. Howeve, woking togethe with Intel, the constuction team leaned new wold-class methods to design while building in ode to complete the poject in 11 months. The poject was so lage and its timefame so shot that fiece competitos in Costa Rica s constuction secto wee foced to opeate in an entiely new way. Joining foces, seveal companies woked as a team unde a geneal contacto. When the poject was complete, Costa Rica had deliveed on time with a ecod-beaking ate of no accidents at the constuction site. The acquied know-how fo faste, bette and moe secue constuction became the good constuction pactices model, now applied to othe pojects in Costa Rica. The fast-tack pemitting pocess designed fo Intel segued into moe compehensive national legislation simplifying the pocedues fo establishing a business in Costa Rica. Envionmental egulatoy pocedues wee also steamlined. Changing the Govenment s Pioities Intel seved as an impotant impetus fo changes in the way govenment woked with investos. It was the fist time in Costa Rica that a pesident assumed a poactive ole in FDI pomotion and pesonal involvement with investos. Pesident Figuees attended pogess/update meetings elated to the establishment of Intel. The pesident s focus on FDI, and leadeship in seving the needs of investos, set the tone of a high-level national pioity thoughout the govenment and public institutions, and fosteed a new sense of ugency in govenment officials. Sevice oientation. The peiod fom 1997 to 1999 was an optimistic time in Costa Rica s histoy. In meeting commitments made to Intel, Costa Ricans exhibited a gowing confidence that thei small county could compete fo FDI on a woldwide basis, applying wold-class methods inspied by MNCs, such as Intel and Baxte. The Pesident s detemination and vision helped inspie a new can-do attitude and sevice mentality among employees of govenment and autonomous public entities, such as the Univesity of Costa Rica (UCR), the Technological Institute of Costa Rica (ITCR), the National Taining Institute (INA) and the powe and telecommunications authoity, ICE. This esponsiveness to investos is evidenced in the esults of a ange of climatebuilding initiatives. Oveall, all commitments made to Intel wee deliveed on time. The univesities made impotant changes to thei cuicula and intoduced new couses based on Intel s ecommendations. The ovepass to give Intel a diect access to the highway took only thee months fom concept to finish. ICE initiated the assignment of investo accounts to designated executives, sevice level ageements and sevice-quality impovement taining. Aipot customs pesonnel 18

Box 3 Enhancements in Costa Rica s Investment Climate In esponse to Intel s initial equiements fo the poject, enhancements in Costa Rica s investment climate wee implemented in fou main aeas. The following list details those initial enhancements, many of which wee designed to ceate nealy immediate esults. Impovements in the investment climate wee available to all companies, foeign and domestic, thus becoming a legacy of Intel s investment. Labo Foce and Skills Highe numbe of technical gaduates; Ceation of a 1-yea cetificate pogam and a 1-yea associate degee focused on semiconducto manufactuing and micoelectonics at the Technical Institute of Costa Rica (ITCR); Highe quality of technical cuicula in advanced micoelectonics; Language taining pogams at ITCR; Highe level of skills in constuction and poject management by local contactos. Tax and Incentives Revised Fee Zone law, including how to establish Fee Zone opeations outside of an established Fee Zone pak and the addition of a e-investment benefit; Exemption, and eventual elimination, of the 1% capital tax fo all companies, as it counteed the new pomotion of highe technology, which equies lage capital investments. Pemits and Constuction Pemits fast tack, which late gave way to an impotant initiative geaed to simplifying the pocess fo establishing a business in the county; Paallel constuction pemit and deployment, not only to speed the entie pocess but also to povide flexibility to adapt duing the constuction pocess. The acquied know-how fo faste, bette and moe secue constuction became the good constuction pactices model, since applied to othe pojects in the county. Infastuctue and Suppot Industy Impulse and appoval of the Public Concessions Law, to allow fo pivate investos, national and foeign, to paticipate in the constuction and opeation of public woks, such as oads, pots, etc.; Wold-class aipot fo passenges and cago. While it is still unde constuction and not all boading aeas ae emodeled, taveles have aleady benefited fom bette facilities in check-in, immigation and baggage claim aeas; Impoved logistics fo passenge and cago, with highe fequency of flights and the local establishment of wold leades such as FedEx, UPS, DHL, Danzas, AIG; Faste aipot customs cleaance via Intenet to allow fo a 24-h. maximum tip; Highe quality powe, even duing thundestoms, due to powe quality equipment and techniques taught by Intel executives to employees of powe supplie ICE; Pivate-govenment patneships to jointly build and manage a facility, such as the case of the Belen substation built by ICE on Intel s land, with Intel financing and joint supevision; High-tension enegy ate of about $0.05/kWh; Moe developed suppot industy: not only did CINDE dedicate one yea to help global Intel supplies lean about the county and establish easily in Costa Rica, but also local fims upgaded to supply wold-class companies such as Intel. 19

developed a faste cleaance pocess, using the Intenet. This established a new, highe standad of sevice fo the benefit of all fee zone companies. The Constuction Industy Intel had an immediate effect on the constuction industy, stimulating the industy s ecovey duing 1997 and 1998. In 1997 alone, Intel epesented about 37% of all constucted industial aea. 15 By 1998 annual constuction inceased on a eal basis 25% fom 1996 levels. By 2003, annual constuction in eal tems was 50% highe than the 1996 levels seven yeas ealie. 16 Costa Rican Industy Intel s investment also spaked gowth in specific sectos of Costa Rican industy, beginning with the immediate boost the poject deliveed in constuction contacts. A longe-tem and moe indiect impact, the esult of Intel s signaling effect, was the inceased willingness of othe foeign companies in divese sectos to conside Costa Rica as a site fo opeations. The electonics cluste flouished with new foeign and domestic pojects, including supplies to Intel, as well as expansions of existing pe-intel investments. Inceased investo inteest also led to gowth in the medical devices cluste, and to pioneeing investments in sevices, which Intel late einfoced with sevice poject expansions in engineeing sevices (LAES), and moe ecently, in financial sevices, pocuement and technical assistance. By 2004, the local suppot industy supplying Intel included 460 fims fo both mateials and sevices. The Electonics Cluste With the aival of Intel, Costa Rica bolsteed its then incipient electonics cluste. Today this cluste is the lagest among expot sectos, incopoating moe than 55 companies, of which 42 ae foeign. The cluste employs about 12,000 wokes and expots moe than US$1.65 billion in poducts a yea. The lagest segment is micopocessos, which Intel leads. Micowave telecommunication components follows, including companies such as Sawtek, Remec, and Meimac, which stated in Costa Rica in 1996 befoe the Intel investment and gew exponentially aftewad. Teadyne, a semiconducto testing equipment manufactue, also established a sophisticated pinted cicuit boad epai opeation afte Intel established. Despite CINDE s well-ochestated effots, no othe global leade in the high technology field set up in the Costa Rican electonics cluste afte Intel. Seveal top technology companies Hewlett-Packad, IBM, Seagate, Westen Digital and Dallas Semiconductos seiously consideed Costa Rica fo thei pojects, but none wee established, likely due in lage measue to the global economic downtun in 1997 and 1998 that ceated excess manufactuing and assembly capacity woldwide. The cluste also took a hit when Motoola and DSC/Alcatel closed thei Costa Rican telecommunications components opeations, in light of diminishing global demand. To date, Intel continues to be the pedominant playe in this cluste, epesenting most of the cluste s expots. Sawtek and Remec, #2 and #3, espectively, ae fa outdistanced by Intel. The Suppot Industy Global supplies. A diect consequence of Intel s investment was the establishment of satellite offices fo a numbe of global supplies 17 beginning in 1998, poviding building blocks fo the budding electonics suppot industy. Most of these fims, unde contact to povide easily accessible technical suppot fo manufactuing and testing equipment sold to Intel, opened a small sevice cente o located an enginee at the Intel facility. A few component supplies located a epesentative in 20

Costa Rica to wok diectly with Intel. CINDE dedicated one yea to helping these global supplies lean about the county and establish easily in Costa Rica. Since then, CINDE has continued to wok closely with established foeign investos and supplies to ceate stonge links, find new clients within the county, and encouage new fims to locate in Costa Rica. (See Box 4: Supplie Development A Diffeent Type of Investment Attaction.) Local fims. Not only wee new supply outlets attacted by the Intel investment, but also local fims upgaded thei opeations to supply the wold-class companies in the electonics cluste. Seveal Costa Rican companies won contacts with foeign investos, including Intel. Intel woked with local companies to help aise thei quality and cost competitiveness in ode to meet global standads, fo example, in cadboad packaging. In this egad, Intel both helped to incease the local content of its expots and contibuted towad a highe-pefoming supplie base. Intel developed this local supplie netwok despite the fact that it was able to impot inputs without duty, tax o estiction unde Costa Rica s fee zone incentive egime. Box 4 Supplie Development A Diffeent Type of Investment Attaction Unlike lage expotes such as Intel, supplies of intemediate goods choose thei locations based on the size of the local maket fo thei poducts and sevices. This sets up a diffeent dynamic in attacting these investos into a gowing cluste, as in Costa Rica, than fo expot-oiented manufactues. CINDE s effots in developing a supplie netwok have helped to ancho investos in the electonics cluste and othe gowing sectos. In developing supplies, the agency was faced with a typical chicken o egg challenge: investos liked to see supplies aleady in place befoe deciding to invest, but supplies needed to see a maket of potential buyes befoe making the decision to locate. Fo instance, CINDE discoveed that manufactues (supplies) of semiconducto equipment needed to have at least thee potential buyes to waant setting up a local facility. In addition, the industy s hype-dynamic pace meant that plants wee continually efubished and subject to elocation, so equipment supplies viewed any local maket as in constant flux. In tackling the challenge, CINDE leaned to wok though Costa Rica s existing investos to back link supplies to them. This bottom up appoach equied detemining which supplies wee aleady woking with established investos in Costa Rica and might bette seve these investos though local facilities. The agency soon discoveed commonalities between existing investos acoss diffeent sectos. Fo instance, both electonics and medical devices companies contacted with some of the same supplies fo clean ooms, plastics, cadboad packaging, metal mechanics, and othe sevices. Afte identifying the secto-specific decisionmakes within the supplie companies, the CINDE team woked both secto angles of the same pospect. In this way, CINDE was able to cultivate supplies that suppoted gowth in both the electonics and medical devices clustes in Costa Rica. 21

The Ceation of CENAT Anothe elated development, although not diectly a esult of the Intel investment, was the ceation of the National Cente fo High Technology (CENAT) in Decembe 1997. Following the model of Singapoe, Malaysia, Taiwan and Japan, CENAT was a Pesidential initiative to link advanced science and companies in the aeas of IT, mateials science and technologies, such as nanotechnology, biotechnology and advanced manufactuing. CENAT functions unde the esponsibility of the highest academic authoities in the county, the National Council of Univesity Deans. A CENAT pogam in development with the ITCR elates to nanotechnology. Thee ae cuently 13 local supplies to foeign fims, including Intel, in the electonics cluste, mostly in the aeas of metalwok, plastic injection molding, and engineeing sevices. A boade local supply netwok of about 460 fims seves Intel with a ange of othe poducts and coe sevices. Sevices account fo 76% of Intel s local puchases. Poducts and sevices puchased locally include: packaging mateials, logistics, maintenance of clean-ooms, equipment and facilities, infomation technology (IT) sevices, gadening, secuity, health sevices, cateing, and so foth. Developmental and Social Impacts The pesence of Intel also had an impact on Costa Rica s business cultue and the community in geneal. A highly visible and pominent employe, Intel was also an active contibuto to the community and a socially esponsible copoate citizen, 18 especially with egad to social pogams and envionmental awaeness. Intel s effots have had an influence on othe companies in Costa Rica in establishing moe socially esponsible pactices, anothe sot of multiplie effect. Reinfocing the Education Infastuctue Technical education. Intel initially equied impovements in technical education as pat of its conditional ageement. The esulting fluy of enhancements set the tone and famewok fo Intel s continuing close coopeation with Costa Rica s univesities and technical schools. Duing the peiod of Intel s establishment in Costa Rica, Eduado Sibaja, Ministe of Science and Technology, commented that Intel had given a vey impotant push to technical education in Costa Rica, helping to stengthen the county s oveall foundation in this aea. Specifically, Intel s impact is tangibly eflected in a seies of pogams and elationships designed to incease both the numbe of gaduates and thei poficiency. These pogams and elationships include: Pogams and enhanced cuicula at the thee majo educational institutions, ITCR, UCR and INA, especially duing 1999-2003; English einfocement pogam at ITCR; The establishment of a one-yea cetificate pogam and a one-yea associate degee at ITCR focused on new technical fields such as semiconducto manufactuing and micoelectonics, and late, mateials science; Links with UCR s School of Physics and technological and vocational schools fo electonics; Suppot fo the electical, electonics, computing and industial engineeing fields. 22

Hands-on leaning. Intel has also led and suppoted a boad ange of pogams fo teaches and students in Costa Rica s elementay and seconday schools. Examples include: The Intel Innovation in Education pogam, which has donated micopocessos valued at ove US$1.1 million to modenize the laboatoies in schools. Computing teaching pogams. Intel Educate fo the Futue pogam, with a goal to tain 9,000 pimay and middle school teaches in the technological aea. The "Students as Scientists pogam that pomotes scientific eseach in schools. Launched in coodination with the Ministies of Public Education and Science and Technology and thei National Pogam of Science and Technology Fais, this pogam aims to tain 2,000 high school teaches to aise students inteest in sciences. The estimated cost to Intel is about US$70,000. Shaing Knowledge, Business Cultue and Standads Saving the Envionment Intel has been poactive in helping to peseve the natual envionment. In Costa Rica, it ceated the goup, Industial Fiends to the Envionment, and seveal envionmental awaeness pogams. Intel suppoted community envionmental pojects, ecycling pogams in the community and schools, and launched the poject, Save Ou Planet. Fo example, 21 Intel voluntees joined Belen school students to celebate Eath Day and eflect on the impotance of even small effots to impove the envionment, and also advised teaches fom seveal county educational centes on ecycling effots. Global standads. As an intenational business model, Intel also has helped to tansfe its coe values and cultue of global competitiveness. Intel emphasized long-tem planning, discipline, esults, innovation and ethics though specific pogams, such as Shaing the Values and Cultue of Intel and Young Entepeneus. Intel invested heavily in the continual taining of its employees, sending them to opeations aboad fo lengthy skill-building peiods. Exposue to Intel s competitive envionment, knowledge and wold-class pactices helped aise the pefomance standads of its wokfoce and supplies, and enlightened the institutions that intefaced with Intel duing the poject s establishment. 19 A eseach study 20 concluded a significant pecentage of Intel supplies eceived taining fom Intel o have changed thei oganizational pactices o even have intoduced changes in thei poduct vaiety due to Intel... Intel had a positive effect on (the supplies ) opeations. Though difficult to measue, Intel s tansfe of business values and cultue is seen as contibuting to inceased poductivity and competitiveness in Costa Rica, as bette qualified wokes and supplies extend thei pactices and knowledge base acoss the economy. High technology halo effect. As suggested in seveal examples, Intel spued positive developments in Costa Rica s technology secto though diect actions, such as the addition of LAES, the engineeing goup offeing moe sophisticated sevices, and though spillove benefits, e.g., ICE s pilot poject in 2000 to offe advanced Intenet sevices. 21 Robeto Atavia, Dean of INCAE, believes Intel had a positive halo effect in encouaging entepeneus oiented towads technology and innovation. These entepeneus, in tun, ceated a technology pak fo softwae developes and a taining cente fo pogammes. Pehaps these initiatives would have eventually mateialized, but Intel s pesence acceleated the pocess. Woke safety and health. Intel was a pionee fo Costa Rica in the aea of woke safety and health. Following Intel s best pactices, the National Insuance Institute (INS) the wokes compensation insuance entity and geneal insuance supplie in Costa Rica ceated the fist national Job Safety and Health Standad. Intel became the benchmak fo othe companies looking fo guidance, and the 23

showoom fo them to lean and impove thei industial safety and health standads and pactices. Impotantly, Intel equied its supplies and subcontactos to meet stict woke safety qualifications. Fo five consecutive yeas, Intel was honoed with the INS awad, Peventico, in ecognition of its poactive effots to pevent accidents. 24

III. Conclusions Intel s investment and pesence have had an ovewhelmingly positive impact on Costa Rica, geneating both diect and multiplie effects on the county s economy, industy, educational institutions and business cultue. Intel s equiements seved as an impotant motive fo the county to immediately upgade its infastuctue and enhance the investment climate to the benefit of all investos. The pocess of attacting Intel to Costa Rica helped shape the county s investment pomotion stategy and contibuted to the development of its IPA and the way investment pomotion was conducted. Fundamentally new elationships wee foged between the govenment, CINDE and investos, a cohesion that helped Costa Rica to land moe investment and futheed impovements in the investment climate. Intel sent a stong signal to othe investos that put Costa Rica on the global map, and seved as an impotant ally in investment pomotion. Finally, but not least, Intel demonstated its leadeship in aeas of social esponsibility. Much of the impact made by the investment came to the county as unexpected benefits. Sizing Up the Impact The numbes behind Intel s investment in Costa Rica potay the magnitude and diection of the poject. The Intel A&T campus in Costa Rica was initially planned to encompass fou A&T plants and 3,500 employees, eventually eaching US$500 million in investment. At its cuent accumulated investment of US$770 million, the poject has well supassed the planned total investment, eflecting moe than double the initial investment of US$300 million. Howeve, the poject s two plants and 2,900 employees (including those in the additional shaed sevices unit) ae still consideed about half the size of a fully matue A&T opeation. This sizing is due pimaily to the geneal deceleation of gowth in the IT industy, and to a lesse degee, to highe technology density and poductivity that enable smalle facilities to poduce moe with fewe wokes. In any case, Intel s Edwads has said Costa Rica is still a young facility with the potential to each US$1 billion in accumulated investment should conditions pemit. In tems of economic impact, the numbes again speak fo themselves. In ecent yeas, Costa Rica has significantly outpefomed all othe counties in Latin Ameica in FDI. Its 2004 inflows wee US$585 million, coesponding to 3.2% of the county s GDP. The peiod following the investment shows significant GDP gowth, staggeing inceases in expots, and othewise geneally positive outcomes, although Intel s size and volumes exaggeated the depth of Costa Rica s economic downtuns. Intel is esponsible fo a shift in the county s top expots, fom coffee and bananas to electic and electonic poducts. Electonics is now Costa Rica s lagest secto with Intel as the lagest playe. The industy employs 12,000 and expots US$1.65 billion in poducts a yea. The local suppot industy fo Intel alone eflects a base of 460 supplies and US$50-150 million in local puchases of goods and sevices pe yea. 25

Unexpected Benefits In geneal, those with a fisthand knowledge of the poject agee that Costa Rica fulfilled Intel s oiginal expectations, and that Intel exceeded the expectations of the county, the govenment and CINDE: Intel. Intel has expeienced both the benefits and the dawbacks of investing in a small county like Costa Rica. The pesonal attention the copoation eceived fom the Figuees administation and CINDE s staff made it elatively easy to establish and make the poject a success. Howeve, a small maket may have hindeed Intel s effots to find local supplies and sufficient technical human esouces, such as employees with advanced degees in engineeing and computing. Intel executives ae geneally cicumspect on the aspect of elative size, as it also means inceased visibility fo the copoation and its issues. The copoation also discoveed seveal unexpected benefits in Costa Rica, including: A highe level of engineeing and softwae development capacity than expected, which pemitted expansion beyond assembly and test into sophisticated sevices; A high level of manageial matuity, enabling Intel to eplace all expatiates in less than two yeas, athe than in up to thee yeas, the expected timefame fo this pocess; Highe levels of local puchases in goods and sevices than expected, although these levels have vaied by yea. Costa Rica. Intel s investment and FDI in geneal have been advantageous fo Costa Rica and its people, geneating economic gowth, highe paying jobs, expots and maket divesification. As a competito fo FDI, the county can cedit Intel with impovement of Costa Rica s image, development of human esouces, futhe insetion of the county in the global economy, and awaeness of the county s investment conditions and competitiveness. Intel pushed the county, ceating positive pessue to impove, and Costa Rica deliveed. Fo Costa Rica, Intel s impact exceeded expectations, with potentially moe to come. Impotantly, Costa Rica has been positively supised by Intel s expansion into five shaed sevices (cicuit design and validation, softwae development, financial sevices, pocuement and technical assistance) as well as ventue capital investment, potfolio monitoing and eseach. Each of these sevice investments epesents additional paths to development that Intel can suppot. Hindsight on Development of the Electonics Cluste Intel continues to be a lagely unique investment in Costa Rica. In an ideal case, lage technology manufactues would have followed Intel into Costa Rica, as was the case in Ieland, and now in the Chinese povince of Sichuan. (See Appendix 4: Intel in Sichuan Povince, China.) Additional high-pofile pojects might have contibuted to the citical mass to foste a lage local suppot industy and electonics cluste. Although Intel has attacted a lage base of supplies of sevices, this is less tue fo inputs. Some economists in Costa Rica maintain that Intel opeates as an enclave in Costa Rica with limited linkages to the est of the economy, impoting 26

most components fo its assembly and geneating a low economic multiplie effect. Typical of maquila-type opeations, this sot of situation is sometimes consideed esilient in isolating the local economy fom extenal conditions, especially duing high volatility. In etospect, it is clea that extenal conditions initially foeclosed oppotunities that CINDE had developed to land othe "flagship" pojects. In fact, many fims seiously looked at the county, and even made commitments to invest, but late econsideed. Since then, it can be agued that Intel and othe high technology investos may equie a moe developed suppot industy of intenational and local vendos to enhance thei supply chains and pomulgate a full clusteing effect. Good examples of this sot of cluste ae found in Shanghai, Malaysia, Singapoe and Ieland. Although it is clea that Intel was able to develop a suppotive local supplie base including a numbe of globally competitive supplies afte its initial investment, investos may now expect the county to poactively foste gowth in investo-supplie netwoks. Typically, govenments help to spu cluste gowth by facilitating key linkages, and by extending fiscal and egulatoy elief to supplies, such as those offeed though fee zone schemes. Challenges and Next Steps Competitive Dynamics As Costa Rica moves fowad, its potential to attact and ancho FDI likely will be shaped by a mutually einfocing dynamic: an inceasingly competitive envionment fo FDI among wold locations heightened by fiece competitive pessues fo MNCs to lowe thei costs. Sepaately, thee is a damatic consolidation of opeations in South East Asia and China, due to the apid gowth of those makets, costs that ae half of those in the Ameicas, and bette logistics. All these conditions ae ceating a self-feeding ecosystem fo technology manufactuing thee, which makes it moe difficult fo counties like Costa Rica to divet investment flows and land them in thei teitoies. Competition with these makets is a constant stuggle, though cost eduction, competitiveness and positioning. The fact that Intel is constucting new A&T plants in China s Sichuan povince would seem to indicate adjustments in Intel s site selection stategy emphasizing costs elative to qualitative factos. Building Advantage In a constant effot to sustain and gow its investment, Intel Costa Rica has looked fo ways to bette position itself within Intel Intenational. By staying competitive, Intel management ensues the opeation gows deepe oots, making the investment moe sustainable in the long tem. As a esult, Intel Costa Rica is now focusing on activities of highe value and complexity, to help mitigate the fact that its opeation has highe labo costs than those of its Asian countepats. This explains the moe ecent incusion into sevices fo expot by Intel Costa Rica. In spite of its competitive challenges, Costa Rica is consideed to have eal potential to move up the value chain. The county has unique advantages: good maket/custome poximity, stategic shipping logistics via Atlantic o Pacific, an 27

inceasing numbe of flights, and design suppot and customization that could help diffeentiate its location elative to standad high-volume, low-cost opeations in Asia. Fo instance, Costa Rica could become a site fo fowad staging of inventoy, which now takes place in Mexico, Los Angeles and Miami. In addition, CAFTA, the fee tade ageement negotiated between the United States and the Cental Ameican nations, is a positive development fo Costa Rica. 22 CAFTA secues tade access ove the long tem to the United States, and is expected to lessen the uncetainty fo investos moving goods unde the Caibbean Basin Initiative, a unilateal concession by the United States. County Competitiveness Factos Costa Rica has leaned that keeping investos satisfied afte they ae established equies continual attention to impoving investment conditions, but epays geatly with a einvestment ate in Costa Rica amounting to about 50% of total flows. Accoding to Dueñas, competitiveness is not static, but a moving taget evey day of you life. Intel and othe MNCs have shaed with officials in Costa Rica thei benchmaked costs and conditions of top locations unde consideation aound the wold, signaling the investment climate factos in Costa Rica that need attention. These benchmaks pesent a live, dynamic SWOT (stengths/weaknesses/oppotunities/theats) analysis, against which Costa Rica can continually impove its climate at an acceleated pace. Seveal pessing issues illustate the types of factos that may affect Costa Rica as it competes fo FDI in the nea futue. While specific to Costa Rica s situation, these examples ae elevant fo locations woldwide, because they ae lagely diven by measues of global competitiveness. These include: (1) the copoate tax ate; (2) labo flexibility; (3) advanced telecommunications; and (4) advanced engineeing education. Copoate tax ate. The Wold Tade Oganization (WTO) mandates that all expot-oiented incentives be eliminated by 2009. 23 Costa Rican fee zone incentives gant expotes 100% copoate tax exemption fo a numbe of yeas. When eliminated, investos unde the egime would go fom paying zeo o 15% copoate tax to the cuent ate of 30%, a significant disincentive. Even a 15% tax ate may not be consideed enough to entice established investos to stay o expand. Labo flexibility. Cuent labo law sets an eight-hou wok day, which may geneate ovetime, making it moe expensive fo companies to opeate in Costa Rica. Following the successful model unde which it opeates in othe counties, Intel has poposed fou 12-hou days to bette adjust to cetain industial activities and each highe competitiveness levels in Costa Rica. A modification to the labo law has been poposed that allows companies to hie wokes on diffeent schedules, as long as the wokweek emains at 48 hous. Seveal appael opeations in Costa Rica also have equested this sot of flexibility. Advanced telecommunications. It has been suggested that investos in Costa Rica would benefit fom highe quality, yet lowe cost telecommunications. Fo example, evey piece of opeations equipment in Intel s plant is connected 28

via the Intenet to tansmit opeational data in eal time to othe Intel plants aound the wold. In ode to incease thei competitiveness, a apidly gowing numbe of foeign and domestic investos in all sectos equie geate capacity and speed in data, voice and video tansmission, at lowe costs. Advanced engineeing education. The educational standads initially put in place by Costa Rica to accommodate Intel may need upgading as investos move into highe-value added poducts. The intoduction of Intel Costa Rica s Latin Ameica Engineeing Sevices undescoes this pioity; the goup now equies employees with Maste s and PhD degees in engineeing. Bachelo s degee o licenciatua 24 may no longe be sufficient fo moe sophisticated engineeing and eseach and development functions. Lessons While Intel in Costa Rica was a lage, high-pofile poject, the lessons fom the expeience ae nevetheless widely applicable in the pactice of investment pomotion, especially within the context of a developing cluste. (See also Appendix 3: Summay Recommendations.) Leveage the stategic poject as a flagship investment. One stategic investment poject can make a huge diffeence in solidifying a location s competitive position. In the case of Intel in Costa Rica, the diect economic impact, multiplie effects and investment climate enhancements have seved as points of leveage fo the location to win moe FDI. These impacts wee both inheent in the poject itself, and the esult of subsequent effots by Costa Rica to ceate a lage oppotunity. Howeve, while one good poject can be used as a point of leveage, it is not an end in itself. Costa Rica s expeience with Intel suggests that the tageted appoach diected at landing the initial investment is equally citical afte the fact to fully leveage the oppotunity the investment pesents. Once the investment is made, but especially in the case of a lage, highly visible initiative such as Intel, it epesents only the stat of an ongoing pocess to maintain competitiveness that equies a national pioity and stategy at the highest levels of govenment. In a way, this becomes a continuous cycle if the IPA and its county take appopiate steps to fully leveage the oppotunity. Stay abeast of investo equiements and continually adapt the investment climate. Given the dynamic natue of the competitive envionment and extenal maket conditions, leveaging the oppotunity ove a sustained peiod becomes a moving taget. Beyond the oiginal assembly and test poject, Intel s einvestment was impotant in its subsequent addition of sophisticated engineeing sevices, softwae development, financial sevices, pocuement, technical assistance and ventue capital investment. The poject, howeve, has not eached its full potential, no has the cluste, o ecosystem, fully developed. Intel Costa Rica now faces inceasing pessues to lowe costs, and is aiming towad highe-value added activity within Intel Intenational. To stay cuent with investo equiements, any location s investment climate must be continuously eevaluated and adapted. Coodinate suppot among existing investos and the highest levels of govenment. Costa Rica s appoach in woking with Intel offes a model fo close and poductive coodination with investos thoughout the stages of the investment. The govenment listened to Intel and othe investos and acted upon thei issues. It established an institutional famewok duing the pocess of pesuading and establishing Intel in 1996 though 2000 that poved successful in achieving 29

impessive esults. This famewok included mechanisms such as the multifunctional Steeing Committee, as well as a national focus on FDI pesonified by the high-level involvement of the Pesident and othe top govenment officials in FDI issues, stategy and pomotion. Howeve, the national focus on FDI, the fast tack attitude used to close the Intel deal, the Steeing Committee and the committee fo high-technology companies wee not established as pemanent institutions able to suvive ove time, egadless of changes in leadeship and govenment pioities. Develop a stategy to establish sevice and supply netwoks fo pioity sectos. Intel in Costa Rica exemplifies the impotance of cultivating the suppot industy to help ancho pionee investos in the gowing cluste. Seveal appoaches to building a vibant supplie netwok wee employed in Costa Rica, but most stated with undestanding moe about existing investos. Intel equied seveal of its supplies to locate in Costa Rica, and CINDE fist woked to attact moe lage poduces like Intel. The agency discoveed that supplies often needed moe than one locally based client to waant setting up shop in Costa Rica. CINDE late detemined it was necessay to wok with existing investos to back link potential supplies of poducts and sevices that would tanscend sectos. Though this sot of investigative eseach, commonalities wee identified between medical devices and electonics, fo instance, in thei pocuement of clean oom sevices, plastics and metal mechanics. Thus, the development of the electonics cluste also helped to feed the medical devices cluste, and vice vesa, poviding stategic and escalating leveage of the initial Intel investment. 30

Questions fo Discussion 1. What wee the majo diect and indiect impacts of Intel s investment in Costa Rica, and which do you think wee most impotant in attacting futhe investment? Which do you estimate wee the most impotant fo the county s economic development long tem? 2. What aspects of Costa Rica s investment climate equied impovements in ode fo Intel to finalize the deal? Why wee these impotant to Intel and its business stategy? 3. How did the Costa Rican govenment and CINDE leveage the investment afte Intel s initial decision to invest was made? In etospect, what wee the most impotant aeas of activity in sustaining the Intel momentum? In you opinion, ae thee actions not taken by the govenment and/o CINDE that would have futhe leveaged this momentum? 4. Discuss the oles of the signaling effect, the halo effect and othe multiplies in leveaging the oppotunity an impotant FDI poject pesents. Give hypothetical examples of how these effects can be channeled to suppot stategic FDI tagets. 5. Given Costa Rica s expeience, what specific actions can be taken to help ensue a favoable wod-of-mouth efeence fom existing investos? How should the envionment of investo efeences and suppot be stuctued and audited/monitoed, and by whom? 6. How did Intel impact the development of the technology cluste in Costa Rica? Discuss the challenges that CINDE faced and vaious appoaches to attacting both lage poduces and supplies to a taget cluste. 31

Endnotes 1 CINDE is shot fo la Coalición Costaicense de Iniciativas de Desaollo. 2 The two plants encompassed 37,200 squae metes in new constuction, o appoximately 400,000 squae feet. 3 Intel s full A&T configuation in Costa Rica was initially planned to accommodate fou plants and 3,500 employees. 4 Chipsets ae electonic components used to suppot an incease in the pefomance of the micopocesso in desktops, with outing, audio/video, gaphics, communications, and wieless functions. 5 CINDE was esouceful in geneating publicity. The Wall Steet Jounal published a lengthy aticle, Costa Rica s Sales Pitch Lues High-Tech Giants like Intel and Micosoft, featuing Pesident Figuees. Othe publications caied the stoy of Costa Rica as a location fo high-tech investment, including Newsweek, Industy Week, The Jounal of Commece, Expot Today, Wold Tade, Global Finance, The Inside Line, Continental magazine, Investo s Business Daily and Silicon Valley s San Jose Mecuy News. CINDE and the Intel investment wee featued in intenational development publications, such as the Wold Investment Repot of the United Nations Confeence on Tade and Development (UNCTAD) and case studies fom FIAS/Wold Bank/Havad and Thundebid Ameican Gaduate School of Intenational Management. 6 Robeto Atavia, Dean of INCAE, has said that Intel initiated a positive model fo the elationship between a MNC and the pess in Costa Rica. 7 Bob Pelman, Vice Pesident of Finance and Diecto Tax, Customs and Licensing at Intel, as stated in Attacting High Technology Investment: Intel s Costa Rican Plant by Deboa Spa, Foeign Investment Advisoy Sevice, Intenational Finance Copoation/ Wold Bank Goup, 1998. 8 Intel expots wee US$1.03 billion in 2004 and US$1.34 billion in 2005. 9 Estimates used ae by Adián Benes, in his aticle, What the Intel effect is all about, Actualidad Económica magazine, 2001. 10 Intel uses a ange of sevices in the opeation of its Costa Rica campus, including secuity, logistics, food sevice, etc. 11 In Actualidad Económica, Intel s local puchases in 1999 wee estimated at about US$150 million, not including enegy and telecommunications bills paid to ICE. 12 Othe companies located in Belen County in electonics include: Teadyne, Bouns/Timpot, Remec, Sawtek, and Meimac; in medical devices: Hospia (peviously Abbott), Boston Scientific, McGhan and Coloplast; and in call centes: Sykes, Supa, Seton, Language Line and othes. 13 Fo moe details on the investment climate adaptations made by Costa Rica, see the occasional pape, Attacting High Technology Investment: Intel s Costa Rican Plant by Deboa Spa, Foeign Investment Advisoy Sevice, Intenational Finance Copoation/Wold Bank Goup, 1998. 14 The enhancements applied equally to foeign and domestic companies. Costa Rica s Constitution explicitly povides fo fai teatment of all individuals, egadless of oigin, nationality, ace, eligion, etc. 15 As epoted by the Costa Rican Chambe of Constuction. 16 As epoted by the Cental Bank of Costa Rica. 17 These included Photocicuits, NTK, Tios, RVSI, DEK and Pycon, among othes. 32

18 Intel eceived public ecognition and numeous awads in the aea of social esponsibility, including the AmCham Envionmental Awad in 2001 and 2002, the AmCham Gand Pize fo Community Sevice in 2003 and 2005, and the Chambe of Commece Awad fo Copoate Social Responsibility in 2005. 19 These institutions include CINDE, Ministy of Foeign Tade (COMEX), Ministy of Science and Technology (MICIT), the National Taining Institute (INA) and the Technological Institute (ITCR). 20 As cited by Andés Rodíguez-Clae in Costa Rica s Development Stategy based on Human Capital and Technology: How it got thee, the impact of Intel, and lessons fo othe counties; witten fo the Human Development Repot 2001, UNDP, Febuay 2001. 21 Ealy on, Intel had advised Costa Rica to move moe quickly in the aea of Intenet sevices. At the time, Intenet sevices wee exclusively unde RACSA, a wholly owned subsidiay of ICE, the govenment povide of telecommunications sevices. The govenment decided to elevate the impotance of Costa Rica s Intenet offeing, in ode to povide moe bandwidth and speed. 22 Cental Ameican Fee Tade Ageement; since the Dominican Republic joined late, the Ageement is now called CAFTA-DR. 23 Ageement on Subsidies and Countevailing Measues, ageed by WTO membes at the Doha Ministeial Confeence. Thee is an automatic two-yea extension afte 2007, which can be lengthened upon equest by qualifying WTO membes. 24 This is a five to six-yea univesity degee, beyond Bachelo s level, but below Maste s degee. 33

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Appendices 1. Aconyms and Abbeviations 2. The Decision to Invest: A Synopsis of Attacting High Technology Investment Intel s Costa Rican Plant Case Study 3. Summay Recommendations 4. Intel in Sichuan Povince, China 5. Souces of Infomation 35

Appendix 1 Aconyms and Abbeviations This appendix includes futhe explanation of abbeviations used in this publication, including full names in Spanish whee appopiate. In some cases, a shot desciption of the meaning is given athe than an exact tanslation. A&T ATP CAFTA CAFTA-DR CENAT CINDE COMEX CPU FDI GDP GNP ICE ICT INA INCAE INS IT ITCR LAES LIU MICIT MIL MNC P&G PROCOMER CR PROVEE RACSA UCR UNCTAD WTO assembly and test assembly and test plant Cental Ameican Fee Tade Ageement Cental Ameican Fee Tade Ageement afte the Dominican Republic joined Cento Nacional de Alta Tecnología, National Cente of High Technology Coalición Costaicense de Iniciativas de Desaollo, the Costa Rican Investment Boad; Costa Rica s IPA Ministy of Extenal Commece o Foeign Tade cental pocessing unit, the bains of the compute foeign diect investment goss domestic poduct goss national poduct Instituto Costaicense de Electicidad, the state-owned powe and telecommunications authoity in Costa Rica Instituto Costaicense de Tuismo, the Costa Rica Touism Boad Instituto Nacional de Apendizaje, the National Taining Institute Intenational univesity based in Costa Rica offeing MBA pogams Instituto Nacional de Seguos, the National Insuance Institute infomation technology Institute Tecnológico de Costa Rica, the Technological Institute of Costa Rica Intel s Latin Ameica Engineeing Sevices Local Industy Upgade pogam Ministy of Science and Technology Costa Rican Local Industy Upgade pogam multinational copoation Pocte & Gamble Pomotoa del Comecio Exteio, the expot pomotion agency of Costa Rica since 1996 Costa Rican entity to develop local supplies to foeign investos established in Costa Rica State-owned telecommunications company esponsible fo highevalue technology telecommunication sevices, such as faxing, Intenet, intenational dedicated leased lines; a 100% subsidiay of ICE Univesity of Costa Rica United Nations Confeence on Tade and Development Wold Tade Oganization 36

Appendix 2 The Decision to Invest: A Synopsis of Attacting High Technology Investment Intel s Costa Rican Plant Case Study This appendix is a synopsis of Attacting High Technology Investment: Intel s Costa Rican Plant by Deboa Spa, a pape published in 1998 by the Foeign Investment Advisoy Sevice (FIAS) of the Intenational Finance Copoation/ Wold Bank Goup. Many of the lessons concluded in the FIAS case study emain highly elevant in today s pactice of investment pomotion. As the basis fo an ongoing case histoy, it povides citical context fo MIGA s discussion of the Intel investment s impacts ove time. Infomation about Costa Rica and Intel contained in this synopsis is histoical, and theefoe may not be epesentative of the cuent situation. (The oiginal pape in its entiety may be odeed at http://publications.woldbank.og/ecommece.) Backgound The 1996 announcement by Intel, the wold's leade in the semiconducto industy, that it would constuct a new US$300 million semiconducto assembly and test plant (ATP) in Costa Rica aoused consideable inteest in the foeign investo community. Intel s annual evenues wee ove US$20 billion at that time, epesenting thee times the entie goss national poduct (GNP) of Costa Rica, whose population was only 3.5 million. The constuction budget fo the facility dwafed by a facto of six times the total annual foeign diect investment in Costa Rica. The plant s expots wee expected to double the nation s expots by the yea 2000. Afte intoducing the wold s fist silicon micopocesso chip in 1971, Intel possessed an 85% shae of the global micopocesso maket by 1996. Intel was also thee times moe pofitable than the semiconducto industy aveage, as measued by etun on capital. The heat of Intel s stategy elied on using its technological leadeship to continually impove the pefomance of its micopocessos, and as maket leade, to extact the highest pofit magins fom new technology advances befoe the poduct would eventually become commoditized and subject to pice competition. Intel s founde, Godon Mooe, coined the now-famous Mooe s Law, which stated that the pocessing powe of compute chips can (and should) double evey 18 months. Intel set the pace in the industy by intoducing moe poweful chips, eaping pofits in the ealy months afte eleasing the innovation in the maketplace, and moving in apid succession to continually impove its poducts. In ecent yeas, Intel also encouaged demand fo new, moe poweful chips among othe companies, such as Micosoft. This basic cycle of poduct and technology leadeship esulted in a constant need to innovate, and to amp-up eve-inceasing poduction capacity as quickly as possible. Locating Intel s semiconducto ATPs globally was not diven by the need to be close to local makets. Tanspotation costs wee low a minute pecentage of final costs fo the lightweight but high-value technology poduct. Instead, investment aboad was diven by the desie to build lage amounts of incemental assembly and test capacity as quickly and as cost effectively as possible. To educe the facility potfolio isk, Intel poduced at seveal diffeent plants woldwide so that no moe than 30% of its evenues fom any poduct categoy would come fom any one facility o geogaphical egion. 37

Within Intel s competitive envionment, speed and continual poduct impovement wee the citical factos diving its decisions to expand and upgade its poduction capabilities. In contast to Intel s elatively moe capital intensive initial fabication plant (fab) facilities whee the silicon chips ae ceated, Intel s decision on locating new ATP capacity, whee the two-step chip pocess is completed, was diven slightly moe by assued access to a highly tainable and technical, yet low-cost, wokfoce. The wokfoce could paticipate in successive evamping and upgading of the ATP as the maketplace dictated new pefomance equiements evey 18 months. Intel s location selection appaently was influenced also by govenment incentives, in some measue because its investment decisions wee made even befoe specific poduct demand levels could be foecasted with confidence. Fimspecific concessions and financial incentives wee somewhat moe impotant in locating the capital-intensive fab plants than fo ATPs. In contast, ATP location decisions elied elatively moe on wokfoce and human esouce-elated consideations, such as availability of qualified enginees and employee tunove. Intel s Inteactive Site Selection Pocess Intel engaged in an ongoing pocess of continually evaluating possible fab and ATP sites among its investment altenatives. The company maintained a fluid list of possible host counties fo new ATPs, which was actively updated and evised as competitive cicumstances and Intel s peceptions of its needs changed. In ealy 1996, executive management specifically decided to pusue a site fo a new ATP, equiing 400,000 squae feet and employing an initial wokfoce of 2,000 to assemble and test the new line of Pentium micopocessos. Intel convened a team of expets composed pimaily of people who had significant expeience in site selection, including the Vice Pesident fo Site Selection, as well as othe senio executives and staff fom seveal functional aeas within the company. Fo nealy two yeas pio to this decision to select a new ATP site, Costa Rica s national pomotion agency had been tageting and actively appoaching lage, U.S.- based electonics companies. In the late 1980s, CINDE (la Coalición Costaicense de Initiativas paa el Desaollo) specifically decided to focus its effots athe than to spead its limited esouces. Given Costa Rica s high-level technical knowledge and yet elatively low labo costs, as well as an abundance of bilingual citizens, CINDE decided Costa Rica might be well suited to the needs of the gowing global electonics industy. In 1993, CINDE began couting Intel. The last meeting togethe was held a few months befoe the location seach fo a new ATP was fomalized. Howeve, by that time CINDE had aleady inceased its focus on Intel, establishing a poject team of thee senio-most CINDE officials, each focused exclusively on attacting Intel though discete functional aea assignments, such as legal egulation, fee tade zone issues, human esouces, education, eal estate, and so foth. The fist stage of Intel s fomal pocess began when Intel team membes validated fist-level consideations using basic desk eseach to eliminate candidates fom the long list of counties. In addition to Costa Rica, at this point the list included: Agentina, Bazil, Chile, China, India, Indonesia, Koea, Mexico, Pueto Rico, Singapoe, Taiwan (povince of China) and Thailand. While not fomally anked, the vaious citeia weighed at this fist stage included geneally the following consideations: 38

Stable Economic and Political Conditions Including positive economic conditions, an established and eliable political system, and a elatively tanspaent opeating and legal envionment. Human Resouces A sufficient supply of pofessional and technical expetise in a non-union wok envionment. Reasonable Oveall Cost Stuctue Recuing cost consideations such as labo ates, taxation, taiffs, customs fees, and capital epatiation. A Po-Business Envionment Govenment inteested in assisting in economic development and foeign investment, including obsevable signs of economic libealization. Logistics and Manufactuing Lead Times Ability to physically move poduct with efficiency, fom the plant to an intenational point of depatue, and then though customs and expot pocedues. Fast Tack Pemit Pocess Pemits necessay within a tight time schedule of fou to six months. Using these impotant but ough citeia, the Intel team cut its oiginal list of 12 candidate counties down to seven: Agentina, Bazil, Chile, Costa Rica, Indonesia, Mexico and Thailand. Then the decision was made to egionally divesify into Latin Ameica. The fou emaining candidates wee appaently Bazil, Chile, Costa Rica and Mexico. The second stage of Intel s pocess began quickly theeafte, in the sping of 1996, with on-site visits designed to glean an inside s pespective, including local meetings with govenment officials, and local consulting, accounting and law fims on mattes such as eliability and tanspaency of the Costa Rican legal and financial systems. In addition, in-depth analysis was conducted in aeas of citical impotance to Intel, such as local infastuctue, including the opinions and past expeiences of othe foeign investos. Also at this citical ealy stage, Costa Rica s Ministe fo Foeign Tade, José Rossi, and Pesident José Maía Figuees wee actively involved and clealy suppotive. Impotantly at this stage, the Ministe took up the specific ole as the cental point of coodination fo Intel within the Costa Rican govenment. The thid stage was a highly inteactive pocess, duing which a vaiety of Intel executives visited Costa Rica weekly to addess diffeent concens. CINDE seved as the lead agency on each visit, with geneal issues aised in pio analysis and visits now equiing specific esolution and claification. One of Intel s top issues egading Costa Rica elated to the county s elatively small size and the impact Intel could have upon the oveall physical infastuctue, including aipot cago handling and Intel s planned consumption of two key Costa Rican esouces enegy and wate. A second aea of citical impotance was the education system, which would need vaious tageted impovements to meet technical skill equiements and capacity, as well as the levels of English poficiency desied by Intel. These equiements wee matched with geat specificity to Intel s needs, making the govenment s pogammatic concession to seveal impovements pehaps the most inteesting element of the deal. A final concen was a seies of financial consideations, including the oveall opeating cost stuctue net of taxes, and othe standad incentives. While Costa Rica offeed a standad set of fee tade zone exemptions, it did not offe any othe special govenment gants to Intel alone. The fouth and final stage of the pocess began with Intel s announcement of Costa Rica s selection in Novembe 1996, the same yea in which the site selection pocess began. Mexico epotedly had been the fontunne, but was eliminated 39

due to concens ove its ecent cuency cisis and mandatoy union system. Duing this quickly executed but delibeate final stage, the company and the Costa Rican govenment negotiated and concluded a fomal contact, including the awad of vaious pemits and tade zone authoizations, and finalized the govenment s commitment on technical taining issues. Within five months of the announcement date, constuction of the new ATP began. Citical Success Factos Although seveal othe counties also sought Intel s attention, Costa Rica nevetheless was able to win the competition. The factos that contibuted to Costa Rica s success can be summaized along thee dimensions: (1) county factos, (2) negotiating tactics, and (3) specific concessions. County Factos Many of the county-specific consideations that Intel favoed in Costa Rica wee the esult of boad political decisions and economic stategies with a long histoy of implementation, such as the existing, stable political and legal systems and the county s economic agenda. Howeve, at a basic level, Intel also felt comfotable with the sense of long-tem stability and the ability of the govenment to aticulate a eceptive climate fo foeign investos: Political and Social Stability As a full democacy since 1948, Costa Rica had a peaceful histoy and open, accessible govenment. The govenment in tun was tusted by the populace and had a well-accepted mandate to boost economic gowth. Popety ights and ule of law wee fimly in place. Economic Openness and Libealization Most economic activity taditionally was concentated in the agicultual secto until 1982 when debt load, as in much of Latin Ameica, foced changes in policy. Afte that time, Costa Rica had moved damatically away fom policies of impot substitution to an aggessive pogam of economic libealization. In paticula, the govenment moved to pivatize a numbe of state entepises, opened the capital account, lifted estictions on capital epatiation, and made the Costa Rican cuency convetible. It also paticipated in both egional and global tade ageements. Costa Rica also embaced and took specific actions to attact and sustain foeign investment, including standad fee tade zone policies and infastuctue impovements. Foeign owneship is lagely accepted and teated on an equal popety-ight basis. Intel could obseve fist-hand a histoy of an open economy with stong tading elationships in the intenational maketplace, chaacteized by lagely unconstained poduct and capital flows. Focused Development in the Electonics Secto Afte Costa Rica s elatively highe wage levels undecut its focused effots in the appael industy, the govenment evised its industy pioities, elying on the county s welleducated wokfoce as a key diffeentiato. This decision helped focus a stategy on attacting investment among medium- and high-technology foeign fims, paticulaly in electonics. While this was not a new appoach among developing counties, Costa Rica also took steps to invest in education and technical taining, affoding it a low-wage but well-educated labo pool. By investing appoximately 5% of GDP in education, with an 40

active bilingual cuiculum (English as a second language), Costa Rica was fist able to attact smalle investments in electonics manufactuing. This goundwok paved the way fo Intel s consideation of Costa Rica. Receptive Investment Envionment Costa Rica s consistent eceptivity to, and woking elationship with, foeign investos esulted in subsequent enthusiastic ecommendations to Intel fom multinational fims aleady opeating in the county. CINDE was able to use these poweful efeences to complement the stoy Intel head fom the govenment. Negotiating Tactics While the factos aleady descibed wee in lage measue aleady in place in Costa Rica, negotiating tactics and specific concessions nevetheless wee citical to the final outcome: Unified Response Costa Rica used its small size as a competitive advantage, focusing attention on the poject within a close-knit community of govenment, media and business. This ceated an impession of a unified and coopeative govenment team opeating within Costa Rica. CINDE s autonomous, nonpofit oganizational stuctue enabled it to bidge both the govenment and business sphees, making it an effective intemediay fo the pospective investo. CINDE was empoweed to assemble esponses to complex issues Intel was eseaching and to help educate the govenment about Intel s equiements, conveying a tone of openness and esponsiveness that Intel was known to appeciate duing the site selection pocess. Extensive Pesonal Involvement fom the Top It is well known that the Pesident of Costa Rica chose to take an active, pesonal ole in the pocess, insisting that the govenment povide a clea, consistent message to Intel. Pesident Figuees assigned the Ministe of Foeign Tade to coodinate the govenment s esponse among vaious agencies, a ole that became citical as negotiations intensified. Thoughout the pocess, Pesident Figuees spoke nealy evey week with Ministe Rossi and Enique Egloff of CINDE to help taget his intevention, uging othe ministes to expedite mattes citical to the poject. He fequently met, fomally and infomally, with Intel executives visiting Costa Rica. The Pesident, the Ministe and the CINDE executive visited Intel facilities in the United States. Speed Intel s industy is chaacteized by the need fo speed in adapting to epeatedly shot poduct life cycles. Costa Rica demonstated fist-hand that the govenment could be esponsive thoughout the entie site selection pocess, even on complex issues such as addessing educational impovements. Refusal to Engage in Extaodinay Measues The govenment appaently did not make exta-legal aangements, no did it offe damatic giveaways o kickbacks, no did Intel equest any. Although the Costa Ricans wee willing to modify laws, policies and pocedues to accommodate Intel, these wee designed to apply to all foeign investos in Costa Rica. This futheed the county s eputation of tanspaency among foeign investos. 41

Opinion Management The unwillingness to gant Intel special teatment also allowed the govenment to sell the poject domestically. CINDE coodinated meetings with the opposing political paty, as well as with envionmental goups. Specific Concessions Specific concessions wee essential to win the Intel investment. As late as Septembe 1996, Intel still viewed the county s physical and educational infastuctue as inadequate. In addition, the financial tems poposed by the govenment wee less favoable than those offeed by othe nations. Costa Rica addessed each of these issues: Financial Incentives While the govenment s fee tade zone incentives wee well known, attactive, and accessible to all foeign investos, the govenment additionally ageed not to levy a 1% tax (which had tempoaily lapsed) on the assets of companies opeating in fee tade zones. Infastuctue The govenment addessed fundamental concens about the inability of the intenational aipot to suppot numeous ai cago shipments by ganting moe licenses to foeign ai caies. Existing plans wee acceleated fo a new ai cago teminal. Road impovements wee accommodated though contibutions fom both sides. Enegy issues wee moe toubling, since equied electic distibution impovements had to be made by the stateowned utility. The utility ageed to move quickly, and also eceived funding fom Intel fo new substations in exchange fo moe favoable picing fo lage, industial uses like Intel unde a newly developed two-tie ate stuctue. Education Intel s pimay concen was in achieving a labo pool sufficient in size and skills to suppot the company s needs. Although the educational level in Costa Rica was aleady significantly above the nom fo developing nations, the county lacked a sufficient infastuctue to meet all of Intel s human esouce equiements. The govenment esponded by analyzing Costa Rica s high school and taining pogam cuicula against Intel s detailed pesonnel equiements. An extensive list of ecommendations was made to, and appoved by, the Ministy of Education to implement immediately new cetificate pogams and degees, as well as to boost language pogams in both Spanish (fo expatiates) and English fo Costa Ricans. Lessons Although Intel s selection of Costa Rica was a highly specific event, and Costa Rica has a unique pofile as a small, stable nation, thee ae nevetheless seveal conclusions that can be dawn fom this case: 1. Effective Investment Pomotion Stategy and Execution CINDE managed the pocess as a unique case with paticula needs, inteests, and constaints on the pat of the pospective investo. Costa Rica focused on an investment pomotion stategy that matched its existing competitive stengths. CINDE appoached Intel specifically because the company s investment pattens and needs lagely matched both Costa Rica s existing county pofile 42

and its easonable next step up in national potential, especially in infastuctue and education. CINDE continued to lean about the pospective investo by conducting its own eseach all the while Intel was pefoming due diligence, enabling both sides to bette inteact and eventually negotiate with each othe based on a substantive appeciation of one anothe s objectives. 2. National Chaacteistics Inviting to Investos Costa Rica possessed the basic chaacteistics necessay to convince Intel to invest, including but not limited to a stable democacy, an established commitment to economic openness and pogess, and a fully tanspaent legal system. The govenment demonstated a helpful and facilitating appoach to foeign investos, fee fom couption. 3. Effective Govenmental Skills The govenment was consistently esponsive, well pepaed, and clea in its communications. The govenment at all levels appoached the poposition in a coopeative manne, not fom an advesaial point of view. CINDE was empoweed to coodinate and capable in doing so, yet was independent of the fomal govenmental stuctue, making it a moe effective intemediay. 4. Costa Rica s Positive Peception within the Investo Community In addition to ovecoming the hudle of the initial desktop eseach phase, Costa Rica also suvived the initial cut of competito counties due to a positive, wod-of-mouth eputation it aleady possessed among existing investos. Costa Rica had a poven tack ecod of success attacting and suppoting foeign investos, which is an impotant dive fo futhe investments. Maketing is impotant to aise awaeness of a county s potential. Objective publicity can be vey helpful in coveing a county s successes such as an economic boom o innovative taining pogam, but is also hamful in epoting political stife, couption, o instability. Effots to land the fist multinational ae likely citical to longe-tem success because investos often follow the leade. 5. Concessions Need Not Be Fim-Specific Costa Rica ganted no special favos unique to Intel. Concessions made wee not uneasonable o capicious. Rathe, infastuctue adjustments at the aipot, the schools, and the fee tade zones benefited all investos and wee geneally good fo Costa Rica s economy and its longe-tem development goals. 43

Appendix 3 Summay Recommendations This appendix, designed fo developing county IPAs and thei govenment policymakes, extacts key lessons fom the Intel case histoy and applies them to a famewok fo developing an effective location poduct and investo sevices to attact FDI. Fo Developing Counties: 1. Make FDI attaction a national pioity, design a long tem national stategy, tansmit the vision with detemination and execute consistently and in a sustained manne, independent of govenment changes in command. 2. Be awae that competitiveness is a moving taget, and that the county s opeating conditions and investment climate have to be in constant impovement ahead of the taget investos. Instead of ganting specific concessions to a given company, adopt policies and implement efoms that ae of geneal applicability fo all national and foeign investos. 3. Involve the business community in the policymaking dialogue to help attact moe FDI. Ceate systematic mechanisms fo listening caefully to investos and channeling thei concens. 4. Monito and update the county s benchmaking with the help of established investos to infom and enhance pomotional effots. 5. Lean in depth about each ideal ecosystem, i.e., the fully integated and symbiotic investo-supplie cluste fo each secto, and how to develop it well fo investos to come and pospe in the host county. 6. Invest with a long-tem vision in education at all levels and infastuctue elated to the needs of established and taget investos, and to the evolution cuve of the host county. To move up the value chain, a host county must stengthen its highe education, IT infastuctue and logistics. 7. Wok to educe policy uncetainty, an impotant deteent to FDI. Fo IPAs of Developing Counties: 8. Establish a long tem FDI attaction stategy guided by investo benchmaking and SWOT analyses to detemine a few ealistic taget sectos. These may well be in industies othe than technology. Concentate on those tagets. 9. Reseach taget industies and companies. Look fo and lean about those companies that epesent the lage, signatue investos in each secto those that would help catapult the county in the paticula secto. Pepae a stong and pecise case and go afte those with detemination. 10. Have a ealistic, balanced and tanspaent message about the opeating conditions. Do not ove-pomise, so that the investos that settle do not expeience unpleasant supises, and effectively gow to impact the county in many ways fo the long tem. 11. Widely spead the good news of ancho investments establishing in the county, by geneating publicity both nationally and aboad. Utilize testimonials with live investos in pomotion events to add cedibility to the county s message. 12. Guide and suppot the establishment of the investo, and povide aftecae sevices to keep investos satisfied. In addition, continue close contact with top management at the local opeation, as well as with key management contacts 44

at headquates to systematically exploe any new oppotunities the company could futhe expand in the county, including oppotunities in sub-sectos unelated to the initial investment. This investment on the pat of the IPA and the county gives geat etuns in the fom of e-investment. It is easie and less costly to gow an aleady established company than to attact a new one. As pat of this, the IPA must be involved in policy advocacy in suppot of significant advancements to impove the host county s investment climate. 45

Appendix 4 Intel in Sichuan Povince, China Intel ecently set up opeations in Chengdu, China. The following infomation about this poject and Intel s motivations was compiled fom public announcements and elated souces. In late 2003, the Intel Copoation announced it would invest up to US$375 million to constuct a semiconducto assembly and test plant (ATP) its seventh in Chengdu, China. A ecently announced second plant to handle the most advanced micopocessos is expected to open in 2007, binging the total Intel investment in Sichuan up to US$450 million. The Sichuan-based facility is Intel s second ATP in China; one is aleady in place in Shanghai on the east coast. The ATP in Sichuan assembles chipsets using Intel s most advanced packaging technology. The 800,000 squae foot Chengdu facility was initially expected to employ 675, and to ceate pehaps as many as 3,000 jobs in the egion. The site is 4.5 km fom downtown, nea the Shuangliu Intenational Aipot in Chengdu s High-Tech Industial Development Zone. Chengdu has a population of 10.6 million and is the capital of China s southwesten Sichuan povince. Intel is not the fist semiconducto company to invest in a Sichuan plant. Othe companies ae being dawn away fom China s east coast and Beijing westwad to the inteio of the county, including Sichuan, taking advantage of significantly lowe wage ates. The decision to locate anothe ATP in China was appaently influenced by inceasing demand in Asia and the expected potential of the Chinese maket. It also has been suggested that thee is geat peceived value in establishing an ealy, local pesence in a egion the Chinese govenment has tageted fo economic development and inceased FDI. Executives at Intel have said that the company was attacted to Chengdu by its unique stategic position, outstanding educational system and the availability and poficiency of its wokes. In addition, it has been epoted that Chengdu is consideed competitively stong on a global basis in the following aeas: Numbe and quality of univesities, labs and technical institutes; Infastuctue fo electonics, including technology paks; Cost stuctue competitive and sustainable; Low-cost labo; Govenment policy, including Go West incentives to encouage foeign investment in the inteio of the county such as pefeential taxes and infastuctue assistance. 46

Appendix 5 Souces of Infomation Web souces ae followed by a list of aticles and othe published mateials. Cental Bank of Costa Rica (BCCR) web page: www.bcc.fi.c CINDE web page: www.cinde.og Expot Pomotion Agency (PROCOMER) web page: www.pocome.com Intel Costa Rica web page: www.intel.com/costaica AmCham s Business Costa Rica magazine; CINDE Competing fo Investment: A stategic plan to attact investos, June 2004 Baqueo, Mavin; Intel insists on changes in telecommunications and labo...," La Nación, Septembe 2003 Benes, Adian; What the Intel effect is all about, Actualidad Económica magazine #54, 2001 Calino, Maia; Costa Rica attactive to high-tech industies, The Jounal of Commece, Apil 16, 1997 Delgado, Edga; Thee lage MNCs state the county s competitiveness peaked, La Nación, Apil 29, 2002 Díaz, Rodigo; Intel, distotion fo GDP?, La República, August 9, 2004 Dogan, Michael; Costa Rica gets on high-tech map, San Jose Mecuy News, August 10, 1997 Expot Today; Costa Rica: Silicon Rainfoest, July 1998 Heea, Mauicio; Intel invites to invest in the county, La Nación, June 27, 1997 Lukowiecki, Debbie; Intel, much moe than expots, La República, Apil 14, 1999 Mooe, Howad; Tading places, Global Finance, Octobe 1998 Moa, Emilia; Investing 700 millions pe yea in human development, La Nación, Septembe 25, 2004 Muillo, Nelson; Figuees citicizes the dop in foeign investment, El Financieo, June 4-10, 2001 La Nación; Technology expots dop, Septembe 15, 2004 La Nación; Belen geneates 25% of national expots, Septembe 25, 2004 La Nación; Technology becomes the owne of Education, Octobe 2, 2004 Nelson, Roy; Intel s Site Selection Decision in Latin Ameica, Thundebid Intenational Business Review, The Ameican Gaduate School of Intenational Management, Apil 2000 47

Peeia Lima, Edvaldo; Wold-Class Communities, Industy Week, Apil 6, 1998 Quesada, Wilbeth; FDI ecoves taken by Intel, El Financieo, August 9-15, 2004 Quiñones, Sam; Cental Ameican Tige, Wold Tade, Mach 1998 Rodíguez-Clae, Andés; Costa Rica s Development Stategy based on Human Capital and Technology: how it got thee, the impact of Intel, and lessons fo othe counties, Human Development Repot 2001, UNDP, Febuay 2001 Rojas, José Enique; Moe foeign investment is anticipated, La Nación, August 9, 2004 Seyfe, Jessie; Costa Rica makes tech pitch, San Jose Mecuy News, Apil 26, 2001 Shephedson, Nancy; Intel Inside, Continental magazine, Octobe 1997 Spa, Deboa; Whale in a Swimming Pool, Impact, Intenational Finance Copoation/Wold Bank Goup, Summe 1998 Spa, Deboa; Attacting High Technology Investment: Intel s Costa Rican Plant, Foeign Investment Advisoy Sevice, Intenational Finance Copoation/Wold Bank Goup, 1998 Stone, Bad; A Silicon Republic, Newsweek, August 28, 2000 Vogel, J., Thomas T.; Costa Rica s Sales Pitch Lues High-Tech Giants like Intel and Micosoft, The Wall Steet Jounal, Apil 2, 1998 Wad, John; Topical Chips, cove featue, The Inside Line, Febuay 1999 Wells, Louis T.; Revisiting Maketing a County: Pomotion as a Tool fo Attacting Foeign Investment, Havad Gaduate School of Business Administation, Octobe 14, 1999 Yok, Thomas; Costa Rica bids to become a Silicon Jungle, Investo s Business Daily, May 3, 2001 48

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