Real estate and the purchase of Interfin Bank raised expectations with CAFTA and the definition of incentives keys to maintaining this figure.

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The amount of direct foreign investment in Costa Rica this year will surpass the initial expectations of the Central Bank, reaching one billion dollars for the first time.

The Central Bank estimated income of $664 million for this year, but the purchase of Interfin Bank by Scotia Bank alone will add nearly $293.5 million.

In addition, a recent study by the Central Bank quantified foreign investment in real estate including houses, condominiums and lots for the first time.

In 2004 investment in real estate reached $176 million and in 2005 reached $224 million, with the greatest investment in Guanacaste and Puntarenas.

The Central Bank hasn’t estimated real estate investment for 2006, but statistics of the Chamber of Construction indicate that it continues to increase.

In the first five months of 2006 construction increased 152% in Guanacaste and 121% in Puntarenas, according to building permits applied for.

Rigoberto Torres, Chief of Balance of Payments of the Central Bank, explained that the investment in the purchase of Interfin Bank will not be included until the public acquisition offer is finalized.

The definition used for direct foreign investment includes new companies which locate in Costa Rica, merging of foreign companies with national companies, purchase of national companies by foreign companies and the expansion of foreign companies already operating in the county.

Comparison. If the country reaches the one billion dollars foreign investment mark it will not only break a record, but will double the average of the years 2000 and 2001.

The highest figure previously reached was in 2005 when foreign investment went from $653 million to $877 million after real estate investment was included.

The 2005 figure represents 4.4% of gross national product, placing the country above the average for Latin America and the Caribbean for that year, which was 2.7%, according to the Economic Commission for Latin America and the Caribbean.

In absolute dollar figures, however, Costa Rica is still a long way from reaching other competing Latin American countries in attracting foreign investment, especially in the area of high technology services.

Some of these countries are Mexico, which attracted $18 billion in 2005; Chile with $7.2 billion and Argentina with $4.6 billion.

In Central America, competing countries are Panama which attracted $1.027 billion in 2005 and El Salvador which received $477 million.

A long road ahead. For Alberto Trejos, President of the Coalition for Development Iniciatives (CINDE) Costa Rica has the capacity to maintain the investment rate.

“In my opinion, these levels can be maintained and increased in the future, assuming that the country makes the right decisions regarding a number of topics.

Some of these items include education, infrastructure, approval of CAFTA with the U.S. and reform of the Free Zone Law.”

Costa Rica must adjust the incentives for companies in free zones before 2009 according to the World Trade Organization (WTO).

Positive Effects for the Receiving Country

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The book “Foreign Investment in Central America” recently published by the Central American Academy mentions some of the positive benefits which direct foreign investment brings.

Among these benefits are fixed investments made by the foreign firms, the effects on human capital, employment and salaries. Some examples are employee training, financial support of universities and technical high schools and increased job opportunities.

They also influence local companies by creating more competition or by purchasing supplies.

Additionally, the companies share knowledge and technology and increase exports. There are few studies measuring these benefits in Costa Rica to date.

Investment on the Isthmus Tripled

Direct foreign investment has increased in Central America as a whole.

A book recently published by the Central American Academy reveals that from 1990 to 1995 foreign investment averaged $450 million annually, while between 1999 and 2004 it reached $1.5 billion.

Costa Rica had the greatest foreign investment, followed by Guatemala and El Salvador. However, Nicaragua had the highest annual average growth rate (22.5% while the average for all Central American countries was 12.4%).

The increase in foreign investment in the region is due mainly to privatization during the 1990s in neighbouring countries and the development of free zones in Costa Rica.

Source. The United States is the largest investor, but its relative importance is decreasing.

Early in the decade the U.S. accounted for 60% of all direct investment in Central America. In the last few years this decreased to less than half and ended 2004 at 36%.

Other countries that have increased foreign investment in Costa Rica are Mexico investing resources in the areas of food and telephony and Spain in energy, telephony and finance.

Foreign investment from several other Central American countries also increased significantly. It went from less than 1% at the beginning of the 1990s to 10% in recent years. This is based on the information from four countries. Guatemala lacks statistics.

Our thanks to Patrica Leitón and our friends at La Nación – Costa Rica’s largest Spanish circulation newspaper for their permission use this article.

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