Costa Rica Gains Ground As a Nearshoring Hub in Latin America
More than 100 nearshoring projects were formalized in Costa Rica in 2021
Foreign investment in the form of nearshoring has long before existed in Costa Rica.
However, with the Covid-19 pandemic disrupting supply chains worldwide and with the Western economies having second thoughts around offshoring to Asian countries, Costa Rica has been one of the Latin American biggest winners with the recent global switch to nearshoring.
Nearshoring refers to partially or totally developing products and services in a country nearby to the one where those products and services will be sold.
Unlike offshoring, which during the last decades has meant to take production mainly to Asian countries with cheap labor and raw materials, nearshoring is also looking for lower production costs but without the risk of being trapped in further supply chain disruptions.
For decades now, several multinational companies such as Intel have chosen Costa Rica for this, because of a series of advantages the country has which we will explain later. With the pandemic, Costa Rican fame in this regard has skyrocketed.
For instance, in 2021 alone a record number of 103 nearshoring projects was recorded, according to Azofras, which represents free economic zones (“zonas francas”) in the country.
Almost a third of those projects were from companies that were established for the first time in Costa Rica last year.
Costa Rica’s nearshoring potential
Covid-19 is one of the problems that caused the supply chain unsettling, but not the only one.
In fact, a Gartner survey conducted between February and March 2020 –at the start of the pandemic– showed that back then a third of 260 supply chain leaders at an international level had already taken activities out of China.
The trade war between China and the United States in 2018 and 2019 drove tariffs costs upwards, and fears about supply chain vulnerabilities caused by the focus on China outsourcing were other reasons for many leaders to put their eyes somewhere else.
Those fears were not unfounded: the supply chain crisis that started in 2022 proved them right.
Changes in supply chains are different from sector to sector. For instance, a November 2021 report from McKinsey projected that more than 70% of fashion companies were planning to increase their nearshoring share, while 33% of healthcare players had already moved production closer to end markets.
Interestingly enough, textile and medical devices are some of the sectors in which nearshoring investment is being made in Costa Rica, mainly from American companies but also from Europe and Asia.
Around 40% of goods exports and 65% of services exports from Costa Rica are served to the United States — the North American Trade Agreement (NAFTA) has been relevant in this sense.
Costa Rica’s geographical proximity to major markets, such as the United States, is also something leaders from multinational companies value about the country and one of the reasons why they make efficiency-seeking investments in its territory.
As an environmentalist world leader, Costa Rica is also promising for companies that seek sustainable operations.
“Costa Rica has shown great potential for nearshoring not only because of its geographical location, but also because of its vision of having a foreign trade policy open to markets, enabled by a robust platform of free trade agreements that today provide preferential access to two thirds of the global GDP,” said Álvaro Goicoechea from CINDE, the Costa Rican Coalition of Development Initiatives.
Advantages for nearshoring
Federico Campos, a consultant for Deloitte in Costa Rica, explained that a “significant boost” for nearshoring in Costa Rica is the existence of tax benefits offered to companies that operate in free economic zones.
“The country’s human capital is one of its great competitive advantages, since for many years bilingual personnel have been trained in the four basic areas: science, mathematics, engineering and technology,” he added.
The Inter-American Development Bank (IADP) noted in 2021 that “Costa Rica is one of the three countries in the region, together with the Dominican Republic and Mexico, with a history of a positive trade balance in the medical device sector where transnational companies made investments with a manufacturing strategy for export, thereby integrating a way to the country in its global value chains.”
Medical devices are currently the country’s main export product.
“Costa Rica has positioned itself for years in attracting foreign direct investment, and that is why it offers the right environment as an excellent alternative for companies seeking to relocate their manufacturing or service operations to the American continent,” the IADP continued.
The bank added that this is the product of “investment in human capital, training of specialized personnel, and attractive legislation for companies that want to settle on their land.”