Imagine sitting at a trendy and relaxing cafe in the middle of a dynamic and energetic town square, in Latin America, enjoying a cup of fine coffee with a slice of delicious American style cheesecake. You have just entered the world of Rica Cheesecake and Coffee Company. Our team was tasked with developing a concept or service in a foreign country and delivering a research project. The key to this project was selecting the country and a product that would have the greatest chance of success.
We focused on the Central American region of the world. We evaluated the seven countries that comprise Central America and chose one country with the most potential to deliver our product. The countries that were evaluated were; Guatemala, Belize, El Salvador, Honduras, Nicaragua, Panama and Costa Rica. As you can gather from our name of our concept, we have selected Costa Rica. Each country was evaluated by the geographic, cultural, political, infrastructure, economic and overall risk to determine the optimum country.
The countries in Central America had similar characteristics, from their religious beliefs to their “Metizo” population. They also depend on agriculture and tourism for their economies. Central America is plagued with political corruption, economic challenges and a continued drug trafficking problem. One thing that these countries do have is the abundance of natural resources, fertile land, water and wonderful weather.
This is what drives thousands of tourists to this part of the world. We found that a large number of U. S. itizens vacation in Central America, especially in Costa Rica, in fact, they like it so much, they retire there. We have developed our concept with these and may other demographics in mind. In an effort to attract customers and create a competitive advantage, we will commit ourselves to a differentiated product/service strategy and will differentiate ourselves based on customer service, product quality and product uniqueness. Our start-up strategy is to establish a joint venture with the well regarded coffee company, Aventura Ltd.
This will help reduce our initial capital investment and help minimize risks associated with Greenfield operations. By establishing a joint venture we are able to recognize synergistic transfers of product knowledge, this adds more value to our company and our product which ultimately can be passed on to our consumers. Now it is time to imagine the “American” style cheesecake, with a touch of local flavor in coffee. So sit back and relax and enjoy the experience.
With these assessments we are now able to introduce Costa Rica. The next section of this paper will provide a more detailed analysis of Costa Rica in order to illustrate our selection. The first section will detail the Geographic, Social, Economic, Political, and Infrastructural elements of Costa Rica. The subsequent section will then discuss the Business environment in detail. Costa Rica Geographic: Costa Rica is located in Central America between Nicaragua and Panama, bordering both the Caribbean Sea and the North Pacific Ocean, between Nicaragua and Panama.
The climate is tropical and subtropical with a dry season from December to April and a rainy season from May to November. The terrain consists of coastal plains separated by rugged mountains including several major volcanoes. Costa Rica has occasional earthquakes, hurricanes along the Atlantic coast; frequent flooding of lowlands in the rainy season and landslides and the potential for volcanic activity (CIA 2004). Social: The estimated population of Costa Rica as of July 2004 was 3. 9 million people with the largest segment of the population being 15-64 year-olds at 65 percent of the population.
The estimated population growth rate in 2003 was 1. 52 percent per year. The estimated 2003 unemployment rate was 6. 7%, with an inflation rate of 9. 4%. This is based on a labor force of approximately 1. 758 million (CIA, 2004). In Costa Rica a person is considered literate if they can read and write by the age of 15. The official literacy rate for the total population ages 15 and over is 96 percent, proportioned equally between males and females (CIA 2004). The major ethnic group in Costa Rica is white, including “mestizo,” the mixture of Europeans (Spanish) and Indian ancestry (Amerindians), totaling 94 percent of the population.
The other ethnic groups represented are three percent black, one percent Amerindian, one percent Chinese and one percent other. The official language of the Costa Rican people is Spanish with some English spoken. The Roman Catholic religion is the strongest at 76. 3 percent of the population with Evangelical at 13. 7 (CIA 2004). Costa Ricans are profoundly self-conscious of their self-image, which drives their behaviors of the individuals, as well as the nation. The behavior is focused on humility. Costa Ricans are unique because of their “whiteness” and the lack of an indigenous culture.
Identity, 2004) These cultural characteristics offer a unique differentiation that should be taken into account when determining product or service needs of the Costa Rican people. Issues of pride and self-esteem can affect the types and quality of products people are willing to use or purchase. The culture is traditional and conservative. Women are playing an increasing role in business and government. This transition could affect the way one markets to this group. Costa Rica is steeped in religious celebrations. These celebrations are focused around families.
Costa Rica celebrates Easter Week or Semana Santa, Christmas Week and August second, which is the celebration of the Virgin of the Angels. “Costa Rica is also different from other Latin American countries, because it practices a “lukewarm” Catholicism that causes a strange mixture of partying and religious celebration during these holidays” (Culture, 2004). POLITICAL: The Costa Rican government is considered a democratic republic. There are seven provinces, Alajuela, Cartago, Guanacaste, Heredia, Limon, Puntarenas, and San Jose. They achieved their independence from Spain on September 15, 1821, which is now their national holiday.
The Constitution of November 7, 1949 is based on the Spanish civil law system with judicial review of legislative acts in the Supreme Court. Similar to the United States, the governing parties consist of the Executive, Legislative and Judicial branches. Costa Rica maintains diplomatic representation both in the United States and has a United States diplomatic representative located in Costa Rica. Costa Rica is a member of many international organizations including the United Nations, the World Bank and the World Trade Organization.
According to the Economist Intelligence Unit, 2004, Costa Rica’s political risk is rated at a “B. ” ECONOMIC: Costa Rica’s main industries are tourism, agriculture and electronics exports. They produce agricultural products such as bananas, sugar, pineapples and coffee and manufacture medical equipment and electronic components. But by far, tourism is their main economic driver. This is derived by a significant amount of FDI into the tourism industry (Tourism, 2004).
Costa Rica’s exports in 2003 totaled $6. illion, while their imports of raw material, consumer goods, capital equipment, and petroleum totaled $7 billion (CIA, 2004). Costa Rica’s number one top trading partner in both imports and exports is the United States at over 29 percent exported to the U. S. and 35. 4 percent imported from the U. S. The other major trading partner countries include Japan, Netherlands and Mexico (CIA, 2004). Costa Rica’s economy is stable with heavy reliance on the tourism industry. They have been successful in reducing the level of poverty over the past 15 years and they have created a “strong social safety net.
Some of the issues that Costa Rica has been facing are the low prices for their agricultural products such as coffee and bananas, as well as the large deficit and internal debt. They are concerned about reducing inflation. There is also a concern because the cost of imports is rising. Costa Rica has agreed to terms with the US over the Central American Free-Trade Agreement (CAFTA) in January 2004, Costa Rica joined its Central American counterparts Guatemala, El Salvador, Honduras and Nicaragua in signing the agreement.
The US is unlikely to ratify it before November’s presidential and congressional elections (EIU, 2004). Costa Rica has had an increasing GDP, in 2003, their GDP grew 5. 6%. The sectors that account for the growth were agriculture, at 8. 5%, Industry, 29. 4% and Services at 62. 1%. The industries consist of microprocessors, food processing, textiles and clothing, construction materials, fertilizers and plastic products (CIA, 2004). INFRASTRUCTURE: Costa Rica has a significant number of airports, waterways, railways, highways and many ports and harbors.
According to the CIA World Fact Book, Costa Rica has approximately 30 paved airports and 119 unpaved airports. There is also approximately 950 kilometers in the rail system. There is a significant roadway system in Costa Rica with approximately 35,982 miles of highway of which 7,896 are paved and 227,996 are unpaved. According to the CIA World Fact Book, Costa Rica’s communication infrastructure is state-owned.
The country has a good working system in place with approximately 1. illion lines in use. There are approximately 528 thousand cell phones. The broadcast infrastructure in Costa Rica consists of 20 TV broadcast stations and 65 AM and 51 FM radio stations. Business Environment in Costa Rica Openness to Foreign Investment Costa Rica gives a lot of importance to the influx of foreign investment into the country. The UNCTAD in its 2002 World Investment Report classified Costa Rica as one of the six most successful countries in the attraction of the FDI.
The Costa Rican Government welcomes foreign direct investments in the country and consistent efforts have been made in this area by Ministry of Foreign Trade (COMEX) and the Costa Rican Coalition for Development Initiatives (CINDE), a private non-profit association originally created in 1982. Costa Rica’s cost of living is low and the quality of life is the highest among the Central American nations. Its strategic location between the America’s and its duty free access to the US has been the greatest contributing factors attracting investment in Costa Rica.
Costa Rica has an educated, motivated and productive workforce but the operating costs are very low. The country’s economic and political stability have created a stable and friendly business environment. Costa Rica has 8 free Trade Zones which offer many incentives to investors. The Foreign Trade Zones (FTZ) provides investors exemption from taxes on corporate profits, dividends, municipal taxes, import duties and sales taxes. The procedures and regulations for investment, trade and customs are fairly simplified and easy.
Thus the operating risk becomes very low. The high quality infrastructure offers Costa Rica wide connectivity with the world. These factors have facilitated foreign direct investment in Costa Rica. International Investment Agreements Costa Rica has duty free access to U. S through the Caribbean Basin Initiative and has very good relations with them. It has bilateral investment treaties with several Latin American and European countries like Mexico, Chile, Panama, Trinidad, Tobago, Venezuela, Argentina and France, Germany, Spain, Switzerland and others.
It is also negotiating with Canada and Dominican Republic. Costa Rica is currently involved in the CAFTA negotiation. Currency Conversion and Transfer Policies The Costa Rican currency is called the Colon. 100 centimos make a Colon. Smaller denomination coins are not much in use but 25 or 50 centimo coins are in circulation. The foreign currency exchange system allows free possession and conversion of foreign currency into local currency and vice versa, through banks and financial institutions. The US dollar is the best known foreign currency and is easily convertible.
The rate of exchange is Currency other than US$ can be exchanged only with difficulty. Canadian dollars and British Sterling can be exchanged at Banco Lyon, C. 2, Av. Central. Canadian dollars can also be exchanged at Banex, C. Central, Av. 1. German currency can be exchanged at the Banco Nacional inn San Jose. The black market for exchanging money does unofficially exist in San Jose, the capital city. There are no limitations or restrictions on transfer of funds associated with investments, in any available currency, at a legal market rate.
No restrictions are imposed on reinvestments or on the repatriation of earnings, royalties, or capital except when these rights are covered in contractual agreements with the government of Costa Rica. Banking and Capital Market Costa Rica’s banking system comprises of The Central Bank responsible for the monetary and foreign exchange policies, three state-owned commercial banks namely: Banco Credito Agricola de Cartago, Banco de Costa Rica, Banco Nacional de Costa Rica, twenty private banks and two service banks: BANHVI and Banco Popular.
Costa Rica has more than seventy financial institutions. Other international banks doing business in Costa Rica are: Citibank, Scotia Bank and other regional banks such as Bancrecen and Cuzcatlan. Current interest rates range from 12% to 15% in dollars and between 25% to 29% in colons. Financing real estate in Costa Rica is not easy. Only residents are provided loans from banks. Banks traditionally do not loan money to foreigners for the acquisition of fee-simple properties, unless they are residents.
Foreigners who have legal residency generally qualify for bank loans if they can provide evidence of a job and adequate income. The National Stock Exchange, (“Bolsa Nacional de Valores”), Costa Rica, was the first to open in Central America. It started its operations in 1976 and since then the trading activities have grown full fledged. Trading is done mainly on government securities. Insurance The National Insurance Institute is the primary insurance agency in Costa Rica and it is one of the largest insurers in Central America. The agency is state-owned and enjoys a monopoly in the region.
The National Insurance Institute offers policies covering most types of insurable interests (e. g. , fire, earthquake, automobile, crops, life, medical, occupational risk, flood, avalanche, professional liability etc. ). Insurance with foreign companies is allowed but under certain limitations. Expropriation and Compensation Article 45 of the constitution of Costa Rica, states that no property can be expropriated from a Costa Rican or foreigner by the government without full and advance payments and without any justifiable proof of public interest.
If the property is not used by the government for some public purpose, it has to be returned to the owner at the current market value. Dispute Settlement Costa Rican Courts offer a fair and adequate system of resolution of disputes which is ranked as the best in Central America. Costa Rican Constitution has recognized every person’s right to settle disputes through the use of arbitration. Costa Rican courts sometimes take years to settle disputes and hence people have access to other alternative ways. For settlement of local arbitrage people approach lawyers and arbitrators.
Majority of the disputes involve expropriations. Taxation Taxation in Costa Rica is much more simplified than that of many other countries. There are different limits of taxation depending on your income: the more you earn, the more you pay; if you earn less than the minimum amount established by Costa Rican law, you pay no taxes. In Costa Rica, the tax year begins in October 1 and ends September 30, both for individuals and corporations. Under the Costa Rica tax system, residents and corporations are taxed only income earned in Costa Rica or from Costa Rican sources.
Costa Rican Laws do not tax income derived from a foreign source. Income earned from real estate transactions, from assets, goods and rights invested or used in Costa Rica or from commercial, and industrial, agricultural and any other trade or business activities carried out within the country is subject to tax. Sales tax is 13% on the amount paid for goods and services. A municipality tax of 0. 25% is charged on real estate. A transfer tax of 1. 5% of the real value of the property or the value registered with the tax authorities, whichever is higher, is paid.
Stamp taxes are levied on legal documents and an Education and Culture statutory stamp tax is assessed on all business entities. Individuals are subject to a progressive tax schedule and nonresidents, either employed or self-employed, are subject to a flat 15% withholding tax, on all income derived from personal services performed in Costa Rica and are not required to file income tax returns in Costa Rica. Self-employed nonresidents receiving rental or business income must file an annual tax return and are subject to the Self-employment Progressive Tax Rate schedule.
Import Duties According to the Central American Customs System Book (SAC), each type of good has a number or classification for customs purposes, and the rates vary accordingly. Import duties are normally subject to a maximum of 20% and a base of 5%. Certain luxury items are charged almost 100% duties on the value of these goods. Among the highest taxed items are arms and ammunitions (75 percent), costume jewelry (50 percent), fireworks (50 percent), whiskey (50 percent) and wine and beer (40 percent).
A one percent surcharge is imposed on most imports, except medicines and raw materials for human consumption and industry. Tax Incentives Companies established in the Free Trade Zone are offered some incentives: 100% exemption from all exports and re-exports of equipment and machinery, 100% exemption from sales and consumer taxes levied on remittances abroad, 100% exemption on import duties on raw materials, components and capital goods, 100% exemption on taxes on profits for 8 years, and 50% for the following 4 years.
The government offers job bonuses and subsidized training programs for labor. Protection of Property Rights Protection of intellectual property rights is among the best in Latin America, although it is highly inefficient with regards to other nations in the world. Secured interests in both chattel and real property are recognized and enforced, and mortgage and title recording is required by law. Proper care must be taken with regards to title of property as there is always fear of squatter invasions and encroachments.
Delayed judicial proceedings and lack of efficiency on the part of judges specializing in intellectual property enforcements have caused problems in the business software industry. The government has taken steps to improve intellectual property rights (IPR) enforcement and bring its copyright laws into compliance with TRIPS. Right to Private Ownership In matters of land and property ownership, foreigners and Costa Rican citizens have equal rights under the law. Foreigners do not have to live in Costa Rica to own property.
One can own and manage a business in most areas except those that are owned and operated by the government. Foreign companies can set up branches, wholly owned subsidiaries or locally incorporated companies in Costa Rica and can fully own them without appointing Costa Ricans as shareholders. There are certain sectors that are reserved for the state and that require Costa Rican citizenship or residency like electrical power, broadcasting, beachfront property, professional services and wholesale distribution. No private ownership of beachfront property is allowed.
The Costa Rican government owns the first 200 meters of the beach front area, known as the Zona Maritimo Terrestre, or the Maritime Zone. There can be no construction on the first 50 meters of the beach property, but investors may lease the next 150 meters, provided they are a part of a special zoning district. Labor and Regulations Costa Rican labor force is well educated, skilled and motivated. It is known for its efficiency and productivity. Costa Rica has the highest United Nations’ Human Development Index among developing nations and the highest literacy rate among the Central American nations (96%).
This is mainly owing to the subsidized education offered by the government. The National Vocational Training Institute (INA) and private-sector groups provide technical and vocational training to the people of Costa Rica. Costa Rica has a vast pool of professionals probably the largest in Central America. Costa Rica has a number of registered engineers with foreign work experience. It has also many registered medical doctors, dentists, and oral surgeons. Labor related issues are governed by the 1943 Labor Code (Codigo de Trabajo).
These issues include salaries, working conditions, hours of work and overtime, labor disputes and many other such related issues. Labor Courts throughout the country must comply with the code. The National Wage Council states the minimum wage rates for private and public sectors twice a year. According to the code all workers are entitled to a two-week paid vacation and a Christmas bonus equal to one month’s salary on completion of one year of employment, every year. Women are entitled to four months of maternity leave.
The Hourly daily wage rate for non-Qualified workers including benefits is $1. 34 and for qualified workers is $1. 54. For a specialized worker it is $ 1. 85. Overtime rate is hourly rate plus 50%. Thus we can see how cheap the labor in Costa Rica is. Costa Rican Labor Laws require employment contracts between the employer and the employee. All employers must hold an insurance policy with the National Insurance Institute to cover occupational risks. The Employee Protection Act requires the employer to create a contribution of 3% on the employee’s monthly salary.
Foreign nationals without residency status or labor permits are not allowed to work in Costa Rica. According to the labor code 90% of the workers in a country must be Costa Ricans and foreigners cannot occupy jobs for which Costa Ricans are available. Certain flexibilities are provided on request. From this detailed examination of the geographic, social, economic, political, and infrastructural elements of Costa Rica as well as its business environment/climate we were able to construct our business concept, and financing so to reduce most costs associated with barriers of entry.
Costa Rica as such has no significant trade barriers affecting entry of goods and services. Costa Rica has agreed in its Uruguay Round of talks to eliminate all import quotas and reduce tariffs significantly to enhance its trade relations with the U. S as well as the Central American nations and Latin American nations. However, there are certain barriers in the investment and service sector. see exhibit 4 for a detailed examination of potential barriers of entry.