INTERNATIONAL BUSINESS

COSTA RICA
CASE ANALYSIS
AMAR TOSHNIWAL, PGDM-A, ROLL NO. 8 12/22/2011

Question 1: What were Costa Rica's major exports from late 1800s to 1960 ?Why? Explain your rationale based on the relevant International Trade theory. Outline the changes in the international business environment in late 1950s,which induced the Costa Rican Government to change its economic development model. Answer From 1800s the governments started o interfere minimal in trade. Government created a economic environment in which individual producers determines what to produce and where to produce it. Countries started concentrating on a single or few commodities . The main reason for this is explained by International Theory for Absolute advantage , according to this theory the country should produce goods in which it has a natural advantage like climatic conditions ,availability of natural resources or certain labour forces .In case of Costa Rica the countrys climate condition support the production of agricultural commodities such as coffee , banana and pineapples . Thus, Costa Rica concentrated on production and export of coffee and banana and imported goods which it didnt had the advantage in . The following changes in international business environment in late 1950s forced the Costa Rican government to change to import substitution . a) Trade disruptions because of 2 world wars b) A drop in coffee and banana prices relative to the prices of manufactured products, particularly as new commodity producers especially in Africa entered world markets. c) The fact that Latin American countries with less open international markets had insulated themselves from adverse international conditions.

Question 2: When & why do Governments of countries resort to Import Substitution policies? Specifically for Costa Rica, what was the economic rationale for its Import Substitution policies? Which were the other initiatives taken by the Costa Rican Govt. to support it? Why? Answer:

Import Substitution is a government strategy to restrict import to encourage domestic production for local consumption . Many countries from 1930s to 1980s followed import substitution policy as it helps in generating employment , protecting infant industry , increases industrialization , reduce demand for foreign exchange , stimulate innovation and development of countries economic power relative to other countries. The Economic rationale for Costa Rica to switch to Import substitution was that earlier it had concentrated only on agricultural commodities in which it had absolute advantage but due to change in global environment the Costa Rican government saw the need of becoming self reliant and industrialization as key prospect of growth . Thus , they adopted import substitution policy to increase employment , promote industrialization and becoming self reliant. The other initiatives taken by Costa Rican government were to join with 4 other countries El Salvador, Guatemala, Honduras and Nicaragua, so that they industries in Costa Rica had a larger market to cater and can benefit from large scale production . The countries formed CACM (Central American Common Market ) which allowed free flow of goods wthin the agreed countries, thus providing bigger markets for companies .

Question 3.Explain briefly the static effects & dynamic effects of regional economic co-operation among countries .Illustrate your answer for CACM. What was the overall impact of CACM on its member countries? Why? Answer. The static effect of Regional economic cooperation : Static effect is developed when either there is trade creation or trade diversion. Trade creation is when the production shifts to more efficient producers because the more efficient producers have a comparative advantage. This benefits the consumer as it allows them access to quality goods at prices lower than what would have been prevalent had the economic integration not taken place. Trade diversion is when trade shifts from non-member countries of the group to member countries of the group irrespective of the fact that the non-member countries be more efficient than member countries involved in the regional co-operation.

The dynamic effect of regional economic cooperation : Dynamic effects may develop by market growth and increased diversion. Market growth is when the size of market increases due to fall of trade barriers, as a result there is incentive for increasing production to avail economies of scale. Increased competition is when due to opening of markets among member countries, goods are produced by the most efficient producers as a result it increases competition. The impact of CACM on member countries was as follows a) In some cases, import substitution led to increased exports. b) Protectionist policies like price controls, import prohibitions and subsidies were channelling the countrys resources away from areas of production in which it had long been efficient. For e.g. Costa Rica had become self-sufficient in rice production because Govt. prohibited foreign produced low cost rice from entering the market. c) Costa Rica found new markets both local and export for processed coffee and cotton seeds. d) Inefficient producers were able to survive because consumers paid high prices. e) Govt. was able to subsidize domestic producers by levying higher taxes on efficient industries. Question 4.Based on the economic & non-economic rationale for protectionism, comment on the appropriateness of the trade barriers imposed by the Costa Rican Govt. during its Import Substitution regime. Which trade barriers would you have recommended to the Govt. of Costa Rica ? Why? Answer In the early 1960s , Costa Rican government looked for import substitution as a option of restricting imports inorder to industrialize it also increases the foreign investment in Costa Rica . Import substitution protected the local players from foreign competition . Costa Rican government focus was to develop domestic industries due to change in global economic environment. By , restricting import government looked for more inverstment in domestic industry and large scale production . Costa Rican authorities were looking looking to increase sales and revenue for domestic producers and protecting them from foreign competition .

The other trade barriers which Costa Rican government could have imposed are : Tariffs: The Costa Rican govt. Could have imposed tariff on goods imported thereby protecting industries which it thought were important for growth . Consular fees: increasing consular fees increases the cost and time to import the goods , thus imposing consular fees would have reduced the incentive to import . Buy Local legislation : Costa Rican government instead of restricting imports could have imposed a buy local legislation on its product stating that a certain percentage of the product have been manufactured locally . This would increase the amount of investment in domestic market. Standards: Costa Rican government can impose standards on products . High standards on imported goods would mean only those goods which are of better quality than domestically produced goods are imported and the demand and incentive to produce domestically is still there for the manufacturers.

Question 5.What were the key elements of Costa Rica's Strategic Trade Policy from 1990 onwards? Which were the industries identified for Inbound FDI ? Why?Explain your rationale based on the relevant International Trade theory. Answer The key elements of Costa Ricas Strategic trade policy from 1990 onwards have been
1. Target industries that promised high growth potential like medical

2. 3. 4. 5.

equipment , appliances , electronics , softwares etc. Target industries that could pay higher wages and salaries Target industries that required highly educated people and English speaking population Targeting areas where the country has a competitive advantage Making environment more friendly for MNEs such as change in laws , stricter IPR etc

The industries identified for inbound FDI were 1. Medical Instruments and Appliances 2. Electronics and softwares The reason for choosing medial instruments and appliances and Electronics and softwares was that the country had factors which could cater to needs of these kind of industry . Costa Rica had highly educated and English speaking workforce , easy availability of technical operators and engineers , these are the factor inputs for Electronic , software etc industries. The high quality of life , political and social stability , high level of economic freedom meant that people of managerial level would find it attractive and thus Costa Rican government targeted industries based on factors available with the country. Factor Proportions theory explains the reasoning of Costa Rican government focussing towards electronics and softwares industries. The theory was given by Heckscher and ohlin is based on countries production factors like land, labor and capital and the theory says that differences in countries endowments of labor compared to their endowments of land or capital explained the differences in the cost of production of factors. In Case of Costa Rica the country had a high literacy rate but was low on natural resources or land area , thus it focussed on its labor factor to industrialize . It could attract investment by companies due to its highly skilled labor force, political and social stability and stricter laws.

Question 6. Why did the U. S. Govt. provide funding for CINDE? What were CINDE's objectives? How & why did the Costa Rican Govt. support CINDE?As of 2005, to what extent were CINDE & Costa Rican Govt.successful in achieving CINDE's objectives? Explain the rationale for your answer. Answer The US government provided funding for CINDE under its Carribbean Basin Initiative it launched in 1984 aimed to provide several tariff and trade benefits to central American and Caribbean Countries. The reason was both economic and political , Caribbean markets were more cost effective for a lot of products and secondly , to counter the rise of leftist

movement in those region such as guerrillas in El Salvador and the Sandinista government in Nicaragua . Cindes objective were : 1. Aid in economic development 2. Attract foreign direct investment CINDE was created as a non-profit, non-governmental agency using US aid by to attract Foreign investment in Costa Rica , in year 1984 it was acknowledge by government to be of public interest and government identified that CINDE would provide necessary platform for towards economic development and attract FDI. CINDE identified that Costa Ricas competitive advantage lies in manufacturing goods that require skilled labor . Thus they concentrated more on manufacturing of medical devices , computer-chip giant , equipments etc. By 2005 , Costa Rica attracted investment from Procter & gamble , Intel , Abbott Laboratories , baxter etc. About 2/3 of Costa Ricas exports have been manufactured goods. The FDI inflow has grown at 22% per annum , it is 4th largest High-tech exporter of the world and is currently seen as a key destination for operations of multinational companies in a variety of industries, such as advanced manufacturing, medical devices and services.

Question 7.What are your learnings from this case regarding economic development models of small sized developing countries? Explain your rationale. Answer The learnings from case with regard to economic development models for small sized developing countries are :

1. Small sized countries should concentrate upon producing those goods which it can produce more efficiently than others. 2. Attract investment in industries for which you can supply enough factors. 3. Small sized countries should emphasis on becoming an export led economy with greater proportion of export being contributed by FDI based firms utilizing local resources. 4. Small sized countries offer small consumer markets, which may fail to attract big investors of capital intensive industries. As a solution, it becomes necessary for small countries to join hands with other similar countries and form a one big market to attract investors. 5. Before entering into regional economic cooperation, political risks should be evaluated instead of grouping based on country similarity Question 8: Using Country attractiveness-Competitive strength matrix, evaluate for Samsung Electronics, Costa Rica today as a country for its international operations. Which entry strategy you recommend for Samsung Electronics, if you feel Samsung Electronics should enter/continue to be in Costa Rica in a significant way ?Explain the rationale for your answer. Answer: The country attractiveness competitive strength matrix relates country attractiveness to operating forms . Depending on the kind of conditions prevalent in the country and the competitive strength of the company the decision on how to enter the market is taken . thus , evaluation of country and company is important. The economy of Costa Rica heavily depends on tourism, agriculture, and electronics exports. Costa Rica is one of the most attractive destinations for electronics. In the past years it has attracted investments from companies such as like Intel, Remec, Sawtek, Sensortronics etc in the electronics market. The share of electronics export in total exports is around 14% . The country has a literacy rate of 92% , GDP per capita of US$ 10,900 (7 time higher than China) and a Gini Index of 47.9 , which shows that income is mostly equitably distributed . FDi per capita of $448 shows that most of the companies finds the country attractive for investment . Political and social stability and stricter laws for compliance to IPR makes it attaractive for electronics industry. Samsung Group is a South Korean multinational conglomerate corporation headquartered inSamsung Town, Seoul, South Korea. It comprises numerous international affiliated businesses, most of them

united under the Samsung brand. Samsung Electronics is the world's largest information technology company measured by 2010 revenues with assembly plants and sales network in 61 countries across the world employing around 160,000 employees all over. The company had a turnover of 133.78 billion in 2010. In the matrix both Costa Rica and Samsung are high on attractiveness and competitive strength respectively. Thus if Samsung wants to enter into the Costa Rican market it should take the FDI route i.e. a wholly owned subsidiary in Costa Rica.

FDI preferably Wholly owned subsidary

Low Medium

Country Attractiveness

COSTA RICA

High High Medium Competitive Strength

SAMSU NG