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