Caribbean & Central America - November 2024

On 10 October the US embassy in San José referred to Costa Rica as a “silicon rainforest” in a Facebook post explaining the semiconductor supply chain, as the two nations step up nearshoring efforts in the industry.

The post explains that the US is working to make the semiconductor “more resilient by bringing it to the Western Hemisphere,” referring to a drive to reduce reliance on Asian producers of microchips that are vital to the functioning of many technological devices. Building out a regional supply chain is one aim of the 2022 US Chips and Science Act, which provides US$500m for an international technology security and innovation (ITSI) fund. In July 2023, Costa Rica was announced as the first beneficiary of the fund, followed by Mexico and Panama. 

“The United States views Costa Rica as a partner in ensuring the semiconductor supply chain can keep pace with the digital transformation underway,” said Cynthia Telles, US ambassador to Costa Rica, in a statement published in July 2023. “Products ranging from vehicles to medical devices increasingly rely on semiconductors as the building blocks of today’s economy. Our announcement of this collaboration underscores the significant potential to expand this industry in Costa Rica to the benefit of both our countries.”

The ITSI fund focuses on developing assembly, testing, and packaging (ATP) capabilities in these countries, which is a key part of the supply chain but one that is more labour intensive and involves less-complex processes than other parts. It also tends to have lower margins. In the future, these ATP operations will support the new semiconductor fabrication plants being built in the US.

“The ITSI fund augments the Chips Act domestically and is a recognition that we need partners to be able to shift different parts of the semiconductor supply chain to the western hemisphere,” Virginia Kent, senior coordinator for the ITSI fund at the US Bureau of Economic and Business Affairs, a government agency that is part of the US State Department, told FDI Intelligence, an investment tracking service that is part of UK newspaper Financial Times, in an article published 14 August. 

Costa Rica is a logical choice given its strong record in developing high-tech industry such as the medical devices sector, which became the country’s most valuable export sector in 2017. The country is also already home to more than a dozen companies involved in the semiconductor supply chain, which have operations in the country. One long-term investor is US tech firm Intel, which opened its first facility in the country in 1996. It moved one ATP facility to Asia in 2014 but reopened it in 2020, and then announced that it would be committing a further US$1.2bn to scale up operations in August 2023.

“Costa Rica has a proven track record as a nation able to develop a highly skilled talent pool that constantly takes on more and more sophisticated processes,” Marianela Urgellés Batalla, general manager of Costa Rican private FDI consultancy Cinde and a former Intel employee, told FDI Intelligence. 

Costa Rica has also been working to position itself as an attractive destination for semiconductor investments. For example, in February 2023 the country enacted Law 10234, which offers incentives to encourage investment in ATP and other semiconductor services. And in March this year authorities declared the semiconductor industry to be of public interest and published a national semiconductor roadmap setting out plans to attract more FDI in the sector. 

The plan has four main pillars: talent development, including new education programmes, language skills, and initiatives to attract workers with specialised skills; modernising incentives, which aims to bring financial and fiscal incentives into line with new international standards; attracting investment, such as through marketing campaigns targeting industry suppliers; and regulatory framework, which seeks to streamline procedures in order to facilitate trade and investment by simplifying bureaucratic processes.

Danny Agüero Herrera, senior FDI specialist in semiconductors at Procomer, Costa Rica’s trade and investment promotion agency, told FDI Intelligence that the plan is to pitch the country as an ideal spot for research and development, distribution, ATP, and back-end processes operations. The country is already working with the US’ Arizona State University (ASU) on ATP courses as part of a partnership with local universities. Jeff Goss, director of global outreach and extended education at ASU, told FDI Intelligence that “Costa Rica has a good baseline to attract more ATP investment.”

However Asian countries have some competitive advantages, such as lower construction and staffing costs, and Costa Rica faces competition from other Western Hemisphere nations keen to capitalise on nearshoring. The country also has a growing problem with organised crime, which could affect the business environment if it continues to worsen, and there are worries that decreasing investment in the education system will affect its ability to produce skilled workers.

FDI

Costa Rica received a record US$4.69bn in FDI in 2023, a 28% increase compared to the previous year, according to a report from the United Nations (UN) Economic Commission for Latin America and the Caribbean (Eclac) published in August.