Chapter 6 Intel: A Case Study of Foreign Direct Investment in Central America

Chapter 6 Intel: A Case Study of Foreign Direct Investment in Central
America
Felipe Larraín, Luis F. López-Calva, and Andrés Rodríguez-Clare1
1. Introduction
The attraction of foreign direct investment (FDI) constitutes a fundamental element to

support strategies that aim to achieve sustained economic growth in developing countries. This
is because globalization and the attendant opening of the economies to competition require
increased financial resources and technology, which would be impossible to obtain under a
policy of autarky.2 Though relatively well-established principles exist to explain why a
multinational company may decide to move into a specific country, each experience has its
idiosyncratic elements from which both theorists and policymakers can learn important
lessons. There is less consensus, however, on the potential positive or negative effects that
FDI may have on the host economy, and on what factors determine these effects.
This chapter presents a case study of foreign direct investment (FDI) going into a small
country. It analyzes the advent of Intel, manufacturer of microprocessors, to Costa Rica, a
country that is very small indeed when compared with other potential locations for a company
of that nature.
The literature on FDI contains theoretical formulations on the factors that attract FDI
and on policies oriented towards increasing FDI flows to a country.2 There are also models of
the effects that such investment has on the host country at both the micro- and macroeconomic
levels (see Blomstrom and Kokko 1997). Recent attempts to use cross-country data to analyze
1
We are grateful to Gerardo Esquivel, Cristina García-López and José Tavares for very useful comments on an
earlier draft. We received valuable assistance and comments from Ricardo Monge and Maritza Arroyo at CINDE-San
José, and excellent research assistance from Ana María Cerdas. Ricardo Matarrita provided useful information
available in PROCOMER databases.
2
See the discussion on international trade and investment in the region, contained in Chapter 5 of this volume. 2
A classical work is Dunning's OLI model (Dunning 1977), focused on three factors: ownership,
locationspecific, and internalization (the way in which technology is transferred).
FIN 404 Case study #3 Dr. Noura Metawa
the determinants of FDI have faced identification problems, though researchers have managed
to provide good insights on the issue (Shatz 1997b). The theoretical literature also highlights
the impact of FDI on the development of the host country through technological spillovers and
the increased availability of new inputs to both the multinational firm and to other local firms
(Rodríguez-Clare 1996).
Case studies are not as common in the literature, mainly due to data constraints.
Available case studies, however, do provide evidence of the positive effects of FDI on the host
economy, either through systematic analysis or by providing anecdotal, non-systematic
evidence (Ranis and Schive, 1985; Meyanathan, 1994; Lim and Fong, 1991). Country-level
studies have emphasized the macroeconomic impact, using aggregate data of FDI on country
level aggregate variables (Galenson, 1985).
This chapter studies the impact on the Costa Rican economy of Intel’s decision to
move into that country in 1997. We use indicators of both direct effects and selected fiscal and
macroeconomic effects as evidence; sometimes, however, these indicators are more qualitative
than quantitative, due to the shortage of systematically collected data. We also examine
training externalities, as well as the “signaling” effect that Intel has had on other firms’
decision to invest in Costa Rica, thus making Intel itself into a factor of attraction. Costa Rican
economy has had to overcome to be more effective in attracting FDI, this is an important part
of the discussion that follows, as is the fact that large FDI firms like Intel may help bring
about needed institutional reforms by influencing the political balance through a new
arrangement of stakeholders.
The chapter starts by examining the rationale behind Intel’s decision to move to Costa
Rica, and the main obstacles it faced. The next section reviews the literature on the effects of
FDI on the host economies. This is followed by a survey of the indicators that measure the
effects of Intel’s arrival on the economy. We first look at some partial equilibrium
indicators—gross income generated, not at shadow prices—and then, discuss potential general
equilibrium consequences, such as the pressure on prices in the inputs market. For this
purpose, we detail the findings of a short survey we carried out in Costa Rica. We then
describe a number of potential training externalities and linkages, also showing data from a
survey to Intel suppliers. The chapter closes with some general conclusions.
2
2. The Decision Process and Its Rationale: Intel Chooses Costa Rica
A firm invests abroad either to exploit a foreign market (as have several companies that
invested in Ireland to gain better access to the European Union) or to secure better access to
certain inputs, especially cheap labor. This second motive is typical of FDI in small and poor
countries, and certainly influenced Intel´s decision to invest in a microprocessor plant in Costa
Rica in 1997.
But why Costa Rica? Spar (1998), after analyzing Intel´s decision process, concluded
that Costa Rica was chosen because it offered important location-specific advantages. Among
these, the most important ones were the already existing tax exemptions for any firms
satisfying certain conditions under the free zone scheme, the high educational level of the
labor force, a stable political scenario, and a relatively corruption-free environment.
Intel’s decision making
During the process to select the location, the company carefully looked at six countries
in addition to Costa Rica: Indonesia, Thailand, Brazil, Argentina, Chile, and Mexico. Some
basic data about these countries is contained in Table 6-1. In the final stage, the short list
included Mexico (State of Jalisco) and Costa Rica. Mexico seemed to have a better location in
terms of transport costs to the North American market and the Pacific Basin, and it is also a
much larger country. The relatively small size of Costa Rica to receive an investment of the
dimension of Intel’s (US$300 million or equivalent to 2.1 percent of Costa Rican GDP), over
two years with a total committed investment of about US$600 million, made Bob Perlman,
one of Intel’s vice presidents, declare that bringing his company to Costa Rica was like
“putting a whale in a swimming pool” (Spar, 1998). As discussed below, Intel would later
recognize some bottlenecks, especially in the realm of infrastructure, whose elimination
required a good deal of political and financial effort. There has been a consensus, however,
that Costa Rica’s political institutions and educated labor force, combined with the free-zone
regime benefits, more than offset the potential weaknesses that its small size imposes on
3
investors.3 Executives of the company seem to have valued the fact that Intel’s bargaining
power would be greater in a smaller country, as opposed to a larger one like Mexico. They
also felt that Mexico, with both Federal and state governments, represented a double risk of
policy changes.
[insert table 6-1 here]
The process of making Intel executives aware of the advantages that Costa Rica
represented for the company was neither easy nor cheap in financial terms, though its
costeffectiveness soon became evident. Intel’s decision process took more than one year, and
involved four phases: prequalification, site research, contingent announcement and delivery,
and start-up. Seven institutions were directly involved in the process on the side of the Costa
Rican government, all under the direction of the Presidency and the Ministry of Foreign
Trade, and with the coordination and support of CINDE (Coalición Costarricense de
Iniciativas para el Desarrollo), a USAID-funded institution whose main responsibility is
investment promotion. The institutions involved included the Ministry of Education and the
Costa Rican Technology Institute. This would later become an “Intel Associate,” a status that
allows its faculty and students to engage in educational exchange activities, share curricula
with other Intel associates like the California Institute of Technology, and seek funding for
technology development programs carried out by its own researchers.4
Strengths and weaknesses
A study carried out in 1999 confirmed that other foreign investors’ perceptions of
Costa Rica coincided with Intel’s assessment to a large extent (ARC1999). The 61 foreign
investors interviewed ranked “political stability” and “well-educated labor force” as the top
strengths of Costa Rica’s business environment (evaluated at above 8 on a scale from 1 to
3
A summary of the fiscal benefits offered to companies under the Costa Rican free-zone scheme is provided in the
Appendix.
4
Intel provides an annual amount of money from which Intel associates can withdraw funds on a competitive basis
in order to carry out research and development activities.
4
10).5 These companies cited “globalization and competition” as the most important force that
was driving them to look for new locations to invest in. “Going abroad is often a defensive
decision,” they affirmed (ARC 1999, 11). The top ten strengths included “good governance”
and “effective legal system” (with grades between 7 and 8 using the same scale as above). At
the bottom of the list were “geographical proximity to markets” and “size of the domestic
market” (between 4 and 6 in the scale). A very important piece of information to come out of
the survey was that 72 percent of the respondents claimed that they had heard, seen, and read
more about Costa Rica as an investment prospect after Intel’s decision to set up a plant in that
country. This reinforces the belief that investment decisions like Intel’s have an important
“signaling” effect on other potential investors. Within the “awareness” section of the
interview, the recent information about Costa Rica included, as the top-five characteristics its
political stability, “relationship with the US,” “democratic government,” “educated labor
force,” and “good governance” (ARC 1999, 30). Among Costa Rica’s strengths, respondents
also mentioned the bilingual education and the “good quality of life.”
Shortcomings in infrastructure services, especially roads, ports, and the airport, are
mentioned throughout the survey as major drawbacks of Costa Rica. To a lesser extent,
shortcomings were noted in power generation and distribution, and telecommunications
infrastructure. The small size of the domestic market was also considered a weakness
It is important to mention that Intel executives changed their perception of two factors
after investing in Costa Rica. These were the quality and education of the labor force, and the
quality of infrastructure services.6 The former has been seen ex-post as one of the top strengths
of Costa Rica as a location for production, and the latter as an important weakness whose
correction requires a decisive effort on the side of the government. Training its workers, the
so-called “intelization” of its labor force, proved relatively successful in terms of cost and
time, due to the high absorption capacity of the employees. However, Intel was reconsidering
some investments after potential bottlenecks were discovered in the telecommunications and
electricity services. Intel executives were hoping for structural reforms in those sectors to
ameliorate potential problems and allow them to launch ambitious expansion plans. An
5
Among the companies that participated, 36 were in the electronics industry, 13 in medical devices manufacturing,
3 in business services, and 9 in other sectors.
6
This discussion is based on private interviews with an Intel executive in Costa Rica, in August 1999.
5
internal document circulated by an Intel executive in July 1998 stated “It is clear from the
outset that ICE (Instituto Costarricense de Electricidad) does not have a ‘customer service’
philosophy and is not used to dealing directly with a private firm.”7
The explicit plan to promote investment in the country under a coordinated effort did
pay off in the case of Costa Rica. The survey of potential investors and personal interviews
with Intel executives reveal that search costs are considerably reduced when credible
information is provided, and especially when there exists a well-coordinated effort to match
the investor’s needs. As Spar (1998) and the ARC (1999) survey suggest, two important
factors explain Intel’s decision to move into Costa Rica: the specific advantages the country
offered—tax exemptions, good governance and institutional strength, and a highly educated
labor force, among the top ones—and the explicit and coordinated effort by the Costa Rican
government to convince Intel that going to that country was the right decision. A fundamental
point, also emphasized in Spar (1998), is that the Costa Rican government did not promise
Intel any special benefits, fiscal or other; rather, it offered existing advantages that any other
foreign investment under similar conditions could obtain. The latter is a key factor in making
FDI policy credible and reducing the perceived risk of policy change.
3. The Impact of FDI on the Host Economy: Some Theoretical Considerations
The impact of FDI in the host economy can be divided into four main areas:
• the direct effects caused by the investment and subsequent operation of the company,
including the impact on workers and on local suppliers of inputs;
• macroeconomic effects, such as the impact on exports and imports, on GDP, on

unemployment, on wages, and on prices of other inputs;
• fiscal effects related to extra fiscal income generated by the multinational firm, its
suppliers and employees; and
7
ICE is the state monopoly that controls the electricity and telecommunications sectors.
6
• the impact on productivity of the whole economy or at least the sector most related to the
foreign investment, through externalities generated to other firms, including “forward” or
“backward” linkages, technological spillovers, and employee training -that is not
firmspecific.
The first three effects do not require explanation. Thus, the rest of this subsection
focuses on the fourth effect. An important potential effect of FDI on host countries has to do
with the impact on aggregate productivity, which happens through the externalities generated
to other firms. This type of externalities is divided here into three main groups: i) knowledge
and technological spillovers; ii) backward and forward linkages, which make available to
domestic firms new or higher quality inputs that were not available before; and iii) training
externalities.
Knowledge spillovers
The discussion on the existence of knowledge spillovers, or a primitive version of it, can
be traced back to the 1970s, when emphasis was placed on improving business practices and the
business “atmosphere” (Findlay 1978). More important externalities, however, may take place at
the level of technological sophistication that is transferred to other sectors by the technicians and
engineers of foreign firms in the form of tacit knowledge. This can be transmitted even
informally, for example by the interaction of workers of different firms.8 These externalities are
very difficult to measure. Some indirect measures, however, have shown their positive impact
on aggregate productivity in Kenyan and Philippine manufacturing (Pack 1987).

Linkages
Rodríguez-Clare (1996) has shown that FDI may have important positive effects by
changing the environment so that it becomes profitable to invest in some activities that were
not profitable before the arrival of the multinational corporation. In this way, multinationals
can lead to the local availability of inputs that were previously not obtainable in the host
8
An interesting discussion of this informal way of diffusing knowledge is in Arrow (1999).
7
economy, or to improvements in the quality of existing inputs. This important externality rests
on the fact that those new products or services are made available not only to the multinational
corporation, but also to other firms, both foreign and domestic. Moreover, because the inputs
satisfy international quality standards, the competitiveness of the economy at the aggregate
level is enhanced. These could be called “backward-forward” linkages.9
Reform and training externalities
There is one type of “backward-forward” linkage that is not discussed in the literature
but becomes especially important in economies where opposition to structural reforms, such as
privatization, is strong. Consider a case where there is opposition to private participation in
some type of essential infrastructure, like electricity generation and distribution. Suppose that
the strength of the opposition forces, measured by the number of supporters, is a function of
the quality of the service provided by the existing monopoly and/or the demand-supply gap or
relative scarcity of the service. The arrival of the multinational corporation, and its demand for
the service, in terms of both quantity and quality, may become an important force to weaken
opposition to the reforms, by making evident the insufficiency of the existing service and the
incapacity of the government to invest the required amounts to satisfy demand. Opening such
infrastructure sectors to private participation may increase the quantity and quality of the
supply of the input, and thereby raise the productivity of both foreign and domestic firms.
Multinationals would in this indirect way play an important political role in pushing for the
required structural reforms.
Training externalities are an obvious benefit from FDI. From a theoretical perspective,
this could be seen as another way to make a better input available not only to the multinational
firm itself, but eventually to other firms, provided that the training involves some general,
non-firm-specific skills.
4. Intel in Costa Rica: A Whale in a Swimming Pool?
9
As shown in Rodríguez-Clare (1996), the positive effect of FDI is maximized if the input used by the multinational
firms—and potentially made available to other firms—is less tradable, if the multinationals use few
8
After the above theoretical considerations, there remains the important question of
whether the effects of Intel’s investment have been positive or negative for the Costa Rican
economy as a whole. The next two sections provide evidence that Intel’s investment has been
positive for the Costa Rican economy in the short run and is likely to continue being so in the
future. In this section we explore the direct effects of Intel; then, we discuss the
macroeconomic effects.
Wages and employment
The amount paid as wages and benefits (which includes contributions by both
employees and employer to social security, the national training program and mandatory
savings, among others) to Intel employees between September 1997 and September 1998 was
US$5.5 million, and US$25.29 million for the same period one year later (see Table 6-2). This
last amount is equivalent to 0.2 percent of the 1999 Costa Rica’s GDP.10
[insert here table 6-2]
The number of employees increased from 441 between September 1997 and September
1998, to 2,217 over the next 12 months, with an important component of professional
employees (see Table 6-3). The total work force in Costa Rica was 1,383,452 in 1999.
As can be seen in Table 6-4, the average wage per employee is higher at Intel than the
corresponding figure for the total manufacturing sector in Costa Rica. We lack the data
required to tell how much of this difference is due to the fact that Intel hires better-qualified
employees relative to the use of inputs, and if the transmission of information between the headquarters and the
branch is more costly.
9
workers, and how much to the fact that Intel pays higher wages than other companies to retain
workers after they have been trained or “Intelized.”
Domestic purchases
Another indicator of the direct effect of a company like Intel on the host economy is its
domestic purchases. Intel’s confidentiality policies did not allow access to the whole range of
links with domestic suppliers, especially those that provide more sophisticated inputs. 11
However, using data from non-specialized providers of goods and services in 1998 allows us
to set the lower bound on domestic purchases at US$19 million. The latter only includes
providers of goods and services that are not related to the production process itself, but are
related to construction, safety, office appliances, etc. As a company benefiting from the
“freezone” arrangement, Intel has to disclose information on purchases “imported” into the
zone, i.e., purchases from suppliers outside this scheme. Information is not available, however,
on purchases from other electronic companies or more sophisticated suppliers that are also
within the free-zone scheme. As an example, if Intel had bought inputs from, let us say,
Protek—a company within the free-zone plan that produces high tolerance electronic
components—that would not be reported in Table 6-5 below.
Investment
The amount invested by Intel to December 1999 was close to 390 million dollars
(equivalent to 2.6 percent of GDP), which is more than the US$300 million they originally
planned to invest. The extra investment occurred in 1999, when Intel decided to start the
production of the Pentium III processor. Around 65 percent of the total investment consisted
10
Of course, this is only mentioned for the sake of comparison , the actual value generated should be measured at
the shadow price of labor.
11
In a second paper, we analyze more detailed data on Intel purchases with data provided by Intel.
10
of machinery (Table 6-6). To understand the importance of this investment, notice that total
FDI into Costa Rica in 1998 was $612 million.
Total FDI as a share of GDP was 2.5 percent in 1991 and 3.2 percent in 1997. That
share represented 4.4 percent and 3.9 percent of GDP in 1998 and 1999, respectively,
according to the levels of investment committed by Intel and other companies, which places
Costa Rica among the top countries in the world in that respect. Among countries in
SouthEast Asia, the FDI contribution is, on average, 6 percent of GDP (Central Bank of Costa
Rica, 1997).
5. Macroeconomic effects of Intel
Overall growth
The growth rate of the Costa Rican economy went from an average 4.9 percent
between 1990 and 1996 to an average 7.3 percent between 1997 and 1999. More importantly,
the growth rate in Costa Rica in the two years after Intel started operations—8 percent in both
1998 and 1999—was the highest in Latin America; taking the two years combined, it has been
the highest in the last three decades for Costa Rica. Considering that Intel started operations on
November 1997, this appears to confirm that Intel had a large impact on the growth rate of
GDP. This is shown more clearly in Graph 6-1, where one should take into account that
although Intel started operations only on November 1997, the investment took place
throughout the year.10
10
Monthly Index of Economic Activity measures the real variation on monthly production. The graph represents
the 12month average for the change rate of previous 12 months.
11
[insert here graph Monthly Index of Economic Activity]

The increase in the growth rate during 1997 and the high growth rates of 1998 and
1999 could also be explained by the fact that Costa Rica was coming out of a recession in
1996. On that year, GDP grew by a mere 0.3 percent. Thus, to confirm that Intel was key in
these very high growth rates, we must turn to Central Bank data that decomposes the growth
rate with and without Intel (see graph 6-2).
[insert here graph 6-2]
The impact is clearer for 1999, when Intel accounted for 5 points out of the 8 percent
growth rate. On that year, Intel accounted for $330 million of value added, approximately 7
percent of GDP at domestic real prices. In addition to its contribution to GDP, Intel also had
important macroeconomic effects through its impact on international trade figures. In terms of
the trade balance, the data shows Intel’s net exports of about $205 million and $1496 million
dollars for the years 1998 and 1999, respectively (Table 6-7). Those amounts represent around
1.5 percent and 9.8 percent of GDP in the respective years.
Foreign trade
Intel´s gross exports represented 17.8 percent of the total amount of exports of the
Costa Rican economy in 1998, and 38.7 percent in 1999. This contributed to an increase in the
ratio of exports to GDP, which went from 33.2 to 43.5 in the 1997– 99 period. Moreover, the
ratio of external-debt service to exports fell from 4.1 percent to 3 percent in the same years
(without Intel exports, this ratio would have been 4.9 percent in 1999).
The openness ratio, that is exports plus imports over GDP, increased from 70 percent
to 83 percent between 1997 and 1999. It was already growing before then, but, as graph 6-3
shows, this trend clearly accelerated in 1997.
12
Intel’s most dramatic impact has been on the trade balance, which went from a deficit of
$497.6 million in 1997 to a surplus of $632.1 million in 1999.11 This was Costa Rica’s first
surplus in 50 years. Most of the impact is purely an accounting matter, however, since Intel’s
surplus is then repatriated as profits, and this shows as a strong deficit in the “rents”
component in the current account. This component went from a deficit of $254.5 million in
1997 to a deficit of $1,67 billion in 1999. What is the net effect? In 1999, Intel’s net exports
were $1.5 billion, and it repatriated profits for $1.2 billion so the net effect on the current
account was almost $300 million positive. Appendix II has the complete balance of payments
for the years 1996 through 1999.
Moreover, Intel helped to strengthen the diversification of Costa Rican trade patterns,
increasing the number of countries with which that nation trades as well as the types of goods
that are traded. The share of exported goods from the primary sector fell from 42.4 percent to
only 23.8 percent in the 1997–1999 period, while the participation of goods manufactured
within the free zones in total exports went from 21 percent to 54 percent in the same period.
As the next Graph 6-4 shows, the share of exported goods from the primary sector was already
declining before Intel arrived, but the tendency clearly accelerated after 1997.
Intel has a very diversified trade pattern in terms of the countries to which the
production is exported. Its imports are more concentrated, as can be seen in Tables 6-8, 6-9,
and 6-10.
It is worth noticing the amount exported to Malaysia (although this falls significantly in
1999) and, in general, the important commercial links Intel has developed with major South
East Asian economies and Japan.
11
This happened at the same time that the real exchange rate remained relatively stable.
13
The company also has a positive trade balance with European countries, as observed in
Table 6-10. The strongest links are with the United Kingdom and Germany. That has helped
Costa Rica strengthen commercial links with the European Union, which has historically been
a difficult market for manufactured exports from developing countries. In this respect,
although the externalities are discussed below, one can think of Costa Rican executives
“learning” about doing business in markets otherwise closed, and becoming potentially
important assets for other companies interested in having access to those foreign markets. In
terms of regional diversification, the most important change Intel introduced in the country’s
historical patterns was an increase in the trade flows with Asian countries (exports to Asian
countries almost tripled between 1997 and 1999, increasing from $148.1 million to $434
million). Intel has important investments in Malaysia, the Philippines, and more recently,
China (Spar, 1998). Table 6-11 shows the important role of Intel in strengthening Costa Rica's
trade relations with Asia and Europe.
Fiscal effects
There is a now a discussion in Costa Rica about the “dual economy” arrangement that
exempts firms in the Export Processing Zones (EPZs) from paying taxes. This imposes a
burden on the rest of the economy and is made all the more problematic by the fact that the
firms in the EPZs constitute the most dynamic sector of the economy. Thus, unless other
measures are taken, tax revenue as a share of GDP will fall progressively in the years ahead,
leading to either higher taxes for domestic firms, higher deficits and the associated
macroeconomic problems, or imposing the need of an expenditure cut.
If there is unemployment, so that no opportunity cost is associated with the workers
hired by the Export Processing Zone companies, then all the profits generated by the EPZ
companies are additional profits; that is, they do not reduce the profits generated by the
14
domestic economy. In other words, in the presence of unemployment, there is no fiscal cost
attributable to the EPZ companies. But, of course, even if there is aggregate unemployment,
the kind of workers hired by EPZ companies in general, and Intel in particular, have a high
probability of getting alternative job opportunities. The latter implies the existence of a
positive fiscal cost. To put it simply, if Intel had not come to Costa Rica, the domestic
economy would be larger, as it would have more highly qualified workers at its disposal, and
thus it would generate more tax revenue for the Government.
One hypothesis is that the fiscal cost changes over time. In the short run, it is likely
that FDI in EPZs generates extra employment, and thus the fiscal cost is low. In the medium
run, the fiscal cost increases, because of the argument laid out above. Then, in the longer run,
the fiscal cost disappears, since the EPZ entails a tax holiday of 12 years, after which the
company starts paying taxes like domestic firms. This is reinforced by the possible reaction of
supply to increased labor demand. For example, the supply of electrical engineers will surely
increase greatly as a consequence of demand from Intel, so it is unlikely that any other firm
will suffer a shortage of electrical engineers because of Intel in the long run.
Presumably, the “gamble” with the EPZ scheme is that the revenue lost is minimal for
two reasons: first, because unemployment exists, there is little displacement of labor from
domestic firms, and second, domestic firms will not go to the EPZs due to the requirements of
the scheme. Moreover, whatever displacement there is, the resulting reduction in tax revenue
is presumably more than justified (and compensated for or even reversed in the long run) by
the positive effects of FDI through other channels. Certainly, this topic needs further empirical
work to be clarified.
Externalities
In order to have some indicators of the general equilibrium effects Intel has had on the
economy, a survey was carried out on twenty firms that were considered potential competitors
of Intel in the market for inputs. Special emphasis was placed on determining the effect on
wages, because of the obvious theoretical implications and also because of comments made in
the newspapers about the so-called “Intel effect.” Firms in the electronics industry claimed
that Intel had put pressure on the wages for skilled labor (La Nación, 1997). The survey asked
15
respondents about the effect Intel’s arrival had had on the prices of certain inputs and their
general perception of the fact that Intel had become a local competitor in the inputs market.12
The survey also asked several questions to determine whether these “competitor” firms
perceived some positive effects on their productivity as a consequence of Intel’s operations.
The firms surveyed, on average, export more than 60 percent of their production but also sell
an important fraction in the internal market (around 30 percent). The composition of their
work force was 20 percent engineers, less than 15 percent administrative employees, and the
rest relatively unskilled labor, the equivalent of what Intel calls “technicians.” The firms were
selected from the pool of firms registered at CINDE. The fact that the firms that we chose to
survey are involved with CINDE may indeed have introduced a selection bias. The survey
firms perhaps showed a special interest in CINDE because they may have benefited more from
Intel's arrival to the country. The results of the survey are summarized below.
Effect on the Labor Market and Other Inputs Prices
The average effect of Intel on the labor market—measured by the pressure on overall
wages—was estimated as a 4.5, measured on a scale from 1 (no effect) to 7 (a very large
effect).13 When specifically asked about wage increases and changes in the benefits to
employees, seven firms said they had increased wages after Intel’s arrival, but five of those
increased wages only to engineers. Increases were, on average, 10 percent to 12 percent in
nominal terms over and above the hypothetical contractual increase those employees would
have received in the absence of any pressure in the labor market. All of those who granted
increases, however, declared that those increases did not affect their competitive position in
the market over the medium term.14
Also, 80 percent of them perceived the increase in real wages as temporary, especially
given the new programs established by the Costa Rican Technology Institute and the
12
Eleven firms responded to the request for information.
13
In most of these questions the scale chosen was from 1 to 7, 1 being always the “best” outcome, and 7 being the
“worst” outcome. Values closer to one are thus “better.”
14
Moreover, most of these companies are foreign-owned, so the increase in wages was a net benefit to Costa Rica,
since the owners of capital who lost as a consequence were foreigners.
16
University of Costa Rica, and the expected increase in the supply of engineers and technicians
in the future.15
At the time of the survey, only three firms said that they had hired personnel
previously employed at Intel, and all of them perceived performance of these employees as
above the average or average. Eight firms said they had hired graduates of the “Electronics
Diploma,” a one-year program aimed at preparing potential employees in electronics firms at
the level of technicians. This program was specifically created after Intel’s arrival in Costa
Rica, under an agreement with the Technology Institute. Those firms that hired people from
such program believed that they had significantly benefited from its creation. All the firms
interviewed, with the exception of one, declared that Intel’s arrival was good for the formation
of human capital in the country and the training of labor. Only two firms admitted to having
changed their training policies—including expenditures devoted to training—as a result of
Intel’s competitive pressure on the labor market.
From the answers of the firms surveyed it is possible to conclude that Intel did indeed
have an effect on the price of labor, especially skilled labor. The “Intel Effect” was thus a
reality. This effect, however, may well be temporary. Intel’s arrival in Costa Rica apparently
increased not only the demand for labor with specific skills, but also its supply, through the
agreements with the educational institutes and the creation of specific programs to train
potential workers in the electronics industry.
The survey included questions regarding the prices of inputs, other labor, and changes
in their prices as a result of Intel’s pressure on the market. On a scale from 1 (a decrease in
prices) to 7 (an increase in prices), the declared effect was, on average, 4.5, that is, practically
no change. The firms did notice an increase (5.5 on average) in the price of certain services
but that increase might not be linked to Intel’s pressure on the market, according to the survey.
Training and the Intel Associate Status

The survey had questions designed to shed some light on the training externalities,
potential spillovers, and linkages derived from Intel’s arrival. In terms of training externalities,
15
According to the data, enrollment in the engineering schools at the Universities almost doubled after 1997 (interview
with officials of the Costa Rican Technology Institute, August 1999).
17
some answers were already discussed above, for instance, the fact that firms were hiring
people graduated from the new program created at the Technology Institute, as well as the fact
that the enrollment in engineering fields in the two most important higher education
institutions of the country almost doubled in two years. At the Technology Institute, for
instance, the number of students enrolled in engineering fields grew from 577 in the first
quarter of 1997 to 874 in the year 2000, that is, from 9.5 percent to 12.5 percent of the total
number of students enrolled. More details on this issue are worth mentioning.
In 1999, faculty members of the Costa Rican Technology Institute visited Cal Tech
with the objective of redesigning the curriculum of the local programs in Costa Rica and
opening new exchange possibilities for students and faculty. On the other hand, as mentioned
earlier, these “Intel Associates” can apply for Intel-provided funds devoted to specific research
and development programs, competing on an equal basis against other Intel Associate
institutions around the world. An estimate of the funds Intel channels through this mechanism
every year is about US$300 million.
The strongest link was created by Intel and the Costa Rican Technology Institute
(ITCR). The “Intel Associate” status also involved: i) the creation of an additional one-year
“certificate” program for technical high school or academic high school graduates to update
their technical skills; ii) the creation of a one-year “associate degree” program for qualified
applicants and graduates of the one-year “certificate program” focused on manufacturing
semiconductors and iii) a program of language training that ITCR would provide to foreigners
arriving in Costa Rica (Spanish) and Intel employees hired in Costa Rica (English). All this
required the approval and supervision of the Ministry of Education.
Informal transmission of knowledge spillovers
Even though it is difficult to measure the spillovers properly in terms of know-how and
technological capacity, questions were asked about the interaction of technicians and
engineers of different companies—including Intel—and potential gains from such interaction.
Concretely, firms were asked whether they had formal channels of interaction between their
employees and people working at Intel. Only two of them mentioned some type of formal
interaction at the level of skilled labor, but none at the level of unskilled labor. To the question
18
of whether such interaction took place in the academic world, in professional organizations, or
some other way, the answer was that there had been only informal contacts with Intel
personnel. No firm had evidence that their employees benefited from informal or formal
contact with Intel employees.
It is important to mention here that companies like Intel have very strict confidentiality
policies due to the competitive pressure in the market. These policies notwithstanding, Intel
agreed to allow us to carry out a survey to the suppliers. The results are described in the next
section.16
6. Linkages: back to suppliers
The attraction by Intel of other, more sophisticated suppliers is another important effect
of Intel’s operations in Costa Rica. In 1998, for example, the American company Photocircuits
announced a 40 million dollar investment in Costa Rica, and projected a work force of 700
employees.
The different suppliers and their reactions

According to available information, there are more than 200 Intel suppliers locally,
ranging from very small service providers to larger companies especially created to supply a
specific input to Intel. Intel declared that the most important suppliers of inputs were 63 firms
and more than 100 were providing services. The areas in which these suppliers are involved
include:
Group 1, Services. Cafeteria service, computer services, document translation, garbage
disposal, janitorial, pest control, security, training services (including language courses), hotel
services, transport, consulting.
Group 2, Manufactured goods. Computer equipment, office equipment, packaging
material, office supplies, spare parts, construction material, security equipment.
The assessment of the economic effect generated through the suppliers, including
indicators of linkages and technological spillovers, would require a detailed analysis of Intel’s
16
A second paper, as mentioned above, explores in detail the results of the survey. A total of 43 suppliers of goods
and 37 suppliers of services answered the questionnaire.
19
purchases, training programs with suppliers, etc. We would have liked more specific
information from some important companies that had set up in Costa Rica and supply Intel,
such as RVSI, NTK, Phillips, Magnéticos Toroid de Costa Rica, Tiros, Alphasem Corp., Delta
Design S.A. and Esec USA, Inc. The data obtained through the survey, however, allowed us to
give some insights of the Intel effect.19
Among providers of goods and services to Intel, the arrival of Intel to Costa Rica was
perceived as “very positive” for the economy (60% of the firms). Tables 6-12 shows the
composition of the activities in which suppliers are involved.
In terms of training externalities, 35% of the providers of services declared to have

received training from Intel (around 80% of the training took place at Intel´s plant). Among
providers of inputs, 17% of the firms declared to have engaged in some kind of training by
Intel. It is important to mention that 40% of the providers of inputs carry out more than 60%
of the production process inside Costa Rica. Around 18% of the providers of goods stated that
they had changed their organizational practices due to their activities with Intel. Around 8% of
the providers of goods and 9% of the providers of services reported some changes in their
19
Ideally, a “linkage index” could be created and compared for different FDI firms to measure potential
technological externalities. This index is based upon the idea of the spillover effect of FDI and is an imperfect
way to approximate the ideal linkage index as discussed in Rodríguez-Clare (1996), which links the labor input
requirements by the FDI and supplier firms.
The index could be of the following, rather rough, form:
∑i VHIi ii
=
LI
TE
where LI is the linkage index, VHIi is the value of the total amount of high technology input i purchased
locally, and TE is the number of employees at the lowest level of skills (técnicos u operarios). Inputs will be
classified as technologically more or less demanding. The rationale is that some firms could indeed be demanding
a large amount of local inputs per employee, but those inputs could be technologically not demanding, which
reduces the scope of potential technological externalities of that firm.
20
product variety due to Intel, which is very important in terms of the backward-forward
linkages discussed above.
Only two years after Intel had been established in Costa Rica –by the time of the
survey-- around 10% of the firms surveyed were selling more than 50% of their total output to
Intel. Another 8% were selling between 10 and 50%. The latter, along with the reported
changes in lines of products and organizational forms in only two years, leads us to believe
that the backward-forward externalities –making available newer and better goods and
services to firms other than Intel—could indeed be taking place.
In term of joint ventures with foreign partners, 12% of goods providers reported to be
associated with a foreign firm. Among those, 80% have received training by the foreign
partner, both in Costa Rica and abroad. Training externalities and forms of technology
transfers were thus already showing up after a short period of time.
A first glance at the aggregate results of the survey, considering the fact that Intel had
been in Costa Rica for only two years at the time the questionnaire was sent to them, allows us
to say that the effects discussed in the theoretical literature seem to be already taking place.
Important gains are showing not only at the macro, but also at the microeconomic level.
Supporting the development of suppliers
Thre have been initiatives by the government to develop and support suppliers of firms
in the free-zones. One is the Program for High Technology Multinational Enterprises,
supported by the IADB, which will start in 2000. On the other hand, CINDE and
PROCOMER have carried out a program to develop suppliers since 1997. Such programs are
not meant to support specifically suppliers of Intel, but to help any firm whose intention is to
supply inputs to exporting firms under the free-zone agreement. Of course, given the high
proportion of the total demand for inputs generated by Intel, since 1997 this firm has become a
fundamental player in the latter program.
21
A fundamental characteristic of the inputs that Intel requires is that they have to satisfy
international standards of quality. In addition, they must satisfy norms of environmental
safety.17 Quality and environmental safety have indeed been the two most important areas of
advisory work with suppliers. The idea of the program to support Intel suppliers was
supported by the United Nations and the Inter-American Development Bank (IDB) from 1997,
and the program itself was formulated in 1998. It is finally being implemented in 2000, with
IDB support. The three main sectors in which firms will be developed are machinery and
parts, plastics, and packaging (including the materials for shipping at the ports).
In the program carried out previously by CINDE and PROCOMER, successful

examples are companies that provide freight transportation services to firms in the free-zones,
as well as one that produces high electric resistance packaging materials for Intel. There are
also several small firms that now provide service to Intel’s machinery and manufacture parts
for repairing sophisticated machinery at Intel. Again, all the inputs and services under this
program are made available not only to Intel or to firms in the free-zone, but also to all firms
in the economy.
The survey of Intel competitors in the inputs market, already discussed above, also
allowed us to obtain some indicators of Intel effects. The arrival of FDI firms such as Intel
have made available inputs that did not exist before. These new inputs can be used, as
mentioned, not only by the FDI firm, but also by all firms in the economy, thereby enhancing
aggregate competitiveness. Eight firms maintained that some supplier of inputs had improved
their quality after Intel’s arrival, and specifically mentioned a certain type of service. As an
example, packaging was mentioned as an input that had become more sophisticated in some
specific firm, directly or indirectly due to Intel demand for similar services. The firms
surveyed did not observe a reduction in prices of inputs after 1997, though they claimed that
more specialized input providers had started businesses in Costa Rica, which could potentially
benefit their firms. They did not mention any specific example of inputs under this category.
Summarizing, only two years after Intel’s arrival in Costa Rica, similar firms were seeing
some evidence of backward-forward linkage effects through new or better input providers.
17
These international standards are under the classification ISO-9000 (quality) and ISO-4000 (environmental
norms).
22
Two questions were asked regarding the general perception or assessment of the Intel
effect: first, the perception of the effect on the specific firm being surveyed, and second, the
perception of the overall effect in the economy.18 Firms ranked Intel’s effect on their own
companies at 2.5, within a scale ranging from 1 (very positive) to 7 (very negative). The
impact on the overall economy was estimated as highly positive as well (between 1 and 2).
These rankings thus turned out surprisingly positive, even among firms that could be seen as
competitors of Intel in certain input markets in Costa Rica.
Institutional Reforms and the Signaling Effect
An important component of the effect of FDI in host countries, as discussed

throughout, consists of the so-called backward-forward linkages. In this respect, by 1999 Intel
had started to play an important role in the political discussion about the reform of the power
and telecommunications sectors in Costa Rica. Intel has very clearly avoided any intervention
in the political debate about opening up telecommunications, but it has been used by the
proponents of reform as an element in favor of opening up the market. The opponents also use
it, saying that a firm such as Intel decided to come to Costa Rica despite the supposedly bad
telecommunication services. The political balance among stakeholders in this realm seems to
have changed after Intel’s arrival, and the reforms are more likely to take place, benefiting not
only Intel, but also all other companies in the Costa Rican economy, and even the consumers
themselves. This development could be seen as a clear effect of the backward-forward linkage
type, in which an institutional reform was required.
A very important externality that arises from Intel’s decision to move into Costa Rica
is the “signaling” or informational externality to other firms that could potentially invest in the
country. As was mentioned above, the survey carried out with multinational firms reflected
that those firms had heard more about Costa Rica after 1997, the year in which Intel moved
into Costa Rica (ARC 1999). If we consider the research costs that firms have to undergo
when deciding where to invest abroad as a fixed entry cost, relatively small firms might decide
not to enter because of their inability to cover such costs. The signaling effect by Intel could
18
Specifically, these questions were: “In general, for your company, Intel’s arrival has been…?”, and “In your opinion,
the effect of Intel investment on the Costa Rican economy has been…?”.
23
trigger entry decisions by smaller firms under such conditions. A second possibility in this
respect is that large firms which could financially afford those entry costs, would anyway
“free-ride” on Intel's location-search investment, and thereby reduce part of their costs of
going into the country. This is especially the case considering that Intel did not get any legal
or fiscal firm-specific benefits, but only the same type of arrangement any other firm could get
in the same conditions. The fact that potential entrants into foreign markets benefit from
previous entrants, who already incurred the research costs and developed commercial linkages
has been explored by Aitken et al. (1997) from a theoretical perspective.
7. Conclusions
Though the decision of the Intel to move into Costa Rica in 1997 came as a surprise in
some academic and policy circles, this paper strongly suggests that the conditions of the
country could easily justify this decision from a theoretical and practical perspective. Previous
research and interviews with Intel executives confirmed that the most important factors
attracting Intel to Costa Rica were its political stability, highly educated labor force, relatively
corruption-free environment, and the credibility of the legal institutions. Some weaknesses
were also found: the small size of the country and its poorly developed and maintained
infrastructure services, especially its roads, ports, and airports, and to a lesser extent electricity
and telecommunications. The process of attracting Intel required a well-coordinated effort that
involved ministries, independent agencies, and institutions of higher education. The fiscal
benefits under the Costa Rican free-zone regime for FDI companies was also a key
determinant in Intel’s decision process.
The gross income generated by Intel in terms of net exports, investment, wages and
benefits, and local purchases is very important for the Costa Rican economy. Net exports, and
the economy as a whole have been growing at a significantly higher rate since 1997. Also, the
composition of Costa Rica’s exports has shown a decline in the share of natural
resourcerelated exports and an increase in manufactures.
There were some worries, however, regarding the potential negative effects of Intel’s
arrival from a general equilibrium perspective. Concretely, it was believed that the increase in
24
demand for certain inputs would raise their price, affecting other sectors negatively. The
survey carried out with Intel competitors in the inputs market showed that such negative
effects have indeed been felt, especially in terms of an increase in wages for skilled labor.
Most firms, however, saw the effect as temporary and foresaw an increase in the supply of
skilled labor through the creation of new programs in higher education institutions and the
higher enrollment in existing engineering programs. A majority of them saw Intel’s arrival in
Costa Rica as good for themselves and the Costa Rican economy. A survey of Intel local
suppliers was initially thwarted by Intel’s strict confidentiality policies, which do not allow
Intel executives to disclose the names of their suppliers and prevent the suppliers from giving
any information regarding their commercial relation with the company. After gaining access to
those records, subsequent research will analyze that aspect in more detail.
Available information supports the existence of positive externalities generated by

Intel in the Costa Rican economy. Specifically, Intel has helped to create new training
programs in higher education institutions, and these institutions have become “Intel
Associates,” which allows them to exchange curricula, faculty, and students with Intel
Associates around the world, and to obtain substantial research funds. New investors and
potential investors in Costa Rica claimed to have heard more about Costa Rica after Intel’s
decision, showing that the investment by Intel does play a signaling role to other
multinationals. Moreover, new suppliers of Intel have arrived in Costa Rica. In terms of
informal communication among employees, especially at the engineering level, the survey say
that there is no evidence of knowledge spillovers. Data shown above, collected through a
survey to Intel suppliers, has shown the effects predicted by the theoretical literature are
indeed taking place. The latter was so in spite of the fact that the survey was carried out only
two years after Intel´s arrival to Costa Rica.
The overall effect of Intel moving into Costa Rica appears to be unambiguously
positive. Though the data shown in this chapter has shortcomings, the evidence points in the
direction of a positive net effect, especially when the medium- and long-term effects are
considered. Intel has increased the export capacity of the country, has diversified exports, has
helped to attract other companies into the country, has established important links with the
education community to develop human resources for the benefit of the whole industry sector,
and has changed the balance among stakeholders in the in the public discussion regarding
25
important institutional reforms. Moreover, the development of local suppliers has been fast
and ambitious, thanks to a coordinated effort by the government. Even though the free-zone
regime implies a substantial fiscal sacrifice in terms of tax collection, the figures shown above
suggest that those foregone revenues could be money well spent, if they help establish an
industrial base that becomes the engine of Costa Rica’s future economic growth.
26
Appendix I
Summary of Benefits Under the Costa Rica’s Free-Zone Incentive Package
The following are the benefits program under which 190 companies had come to Costa Rica
as of June 1997. These firms are distributed in eight different industrial parks. Intel is
geographically located in a different area but receives the benefits as though it were in one of
such parks.
i) 100 percent exemption on import duties on raw materials and capital goods.
ii) 100 percent exemption on taxes on profits for eight years, and 50 percent for
the following four years. iii) 100 percent exemption on export taxes, local
sales, and excise taxes, as well as taxes on repatriation of profits.
iv) 100 percent exemption on municipal and capital taxes.
v) No restrictions on repatriation of profits or foreign currency management.
vi) Fully expedited on-site customs clearance. vii) Possibility of selling
products to local exporters.
viii) Possibility of selling up to 40 percent of the production locally, exempt from
sales tax.
Intel also received the benefits offered to firms located in the Puntarenas free trade
zone:
i) Longer exemption from taxes on profits: 100 percent for twelve years and 50
percent for the following six years.
ii) Every year, for five years, the government repays the investors a percentage of
its payroll in the chosen base year (15 percent the first year, 13 percent the
second, 11 percent the third, 9 percent the fourth, and 7 percent the fifth year).
iii) Subsidized training programs in a way that practically results in three months
of free labor for the firm, provided workers receive on-site training.
Source: Spar (1998).
Appendix II
Balance of Payments
1996 1997 1998 1999 *

I. Current Account (A+B+C+D) -264.1 -480.9 -520.7 -583.7
A. Goods -249.2 -497.6 -399.0 632.1

Exports FOB 3,774.1 4,220.6 5,538.3 6,616.0
27
Imports FOB -4,023.3 -4,718.2 -5,937.3 -5,983.9
B.
Services 20.3 140.2 233.6 357.9
Transportations -250.8 -189.1 -213.6 -183.3
Travels 374.0 394.3 504.6 583.2
Others Services -102.9 -65.1 -57.4 -42.0

C.
Income -184.6 -249.0 -468.5 -1,685.2

Compensation of employees 1.9 5.5 -7.1 -7.0
Investment income -186.5 -254.5 -461.4 -1,678.2
D.
Current Transfers 149.5 125.5 113.2 111.5
General Government 45.7 37.5 39.8 39.5
Other Sectors 103.8 88.0 73.4 72.0
II. Capital and Financial Account (A+B) 67.5 508.5 547.7 1,063.7
A. Capital Account 28.1 0.0 0.0 0.0

Capital transfers 28.1 0.0 0.0 0.0
Non-produced non-financial assets 0.0 0.0 0.0 0.0
B. Financial Account 39.4 508.5 547.7 1,063.7

Direct Investment Abroad 421.3 402.5 606.9 578.3
Portfolio Investment -21.5 74.4 -85.6 232.5
Other Investment -360.3 31.6 26.5 252.9

. NE
III T ERRORS AND OMISSIONS 142.0 189.1 -176.6 -
V. Re
I serve Assets 54.5 -216.7 149.6 -480.0
V. Total Balance of Payments 0.0 0.0 0.0 0.0

(I+II+III+IV)
* “Net errors and omissions” for 1999 include “Other Investment” from B. Financial Account.
Source: Central Bank of Costa Rica.
References
28
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Export Behavior.” Journal of International Economics 43:
ARC (Applied Research and Consulting). 1999. Foreign Investment in Costa Rica and Other
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Arrow, K. 1999. “Knowledge as a Factor of Production.” Paper Presented at the ABCDE

1999 Conference. Washington, D.C.: World Bank.
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———. 1997. “The Effects of Foreign Direct Investment in Host Countries.”
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Buffie, E. 1993. “Direct Foreign Investment, Crowding Out, and Underemployment in the
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Caves, R. 1971. “International Corporations: The Industrial Economics of Foreign

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———. 1976. Multinational Enterprise and Economic Analysis. London: Cambridge

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Central Bank of Costa Rica 1997. Indicadores Económicos. San José.
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Hymer, S. H. 1976. The International Operations of National Firms: A Study of Direct Foreign
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La Nación. 1997. “Falta Mano de Obra Calificada.” October 3.
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Lim, L.Y.C. and P. E. Fong. 1991. Foreign Direct Investment and Industrialization in
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Meyanathan, S. D. 1994. Industrial Structures and the Development of Small and Medium
Enterprise Linkages. Washington D.C: World Bank
Pack, Howard, and Larry E. Westphal. 1986. “Industrial Strategy and Technological Change:
theory vs. Reality." Journal of Development Economics 22: 87-128.
Pack, H. and A. Rodríguez-Clare.1998. "A Firm-Level Analysis of the Effect of FDI: A Case
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Economic Activity. London
30
: Macmillan.
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Rodríguez-Clare, A. (1996); “Multinationals, Linkages, and Economic Development.”

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———. 1985. “Internalization is Still a General Theory of Foreign Direct Investment.”

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31
Table 6-1
Human Development Indicators
Indicator IndonesiaThailandBrazil ArgentinaChile Mexico

Costa Rica
IDH 105 67 79 39 34 50 45
GNP (US$ billions) 221.5 165.8 784.0 319.3

70.5 348.6 9.3
1997
GNP annual growth rate (%) 1975- 7.1 7.8 3.5 1.4 5.5 2.8
3.7
95
Average annual rate of inflation
(%)
1985- 8.6 4.8 569.8 162.9 16.0 40.7 17.8
1996
1996 8.5 4.0 17.2 1.9 2.9 28.7 16.2
Real GDP per capita (PPP$ 1,110 2,740 4,790 8,950 4,820
3,700 2,680
1997)
Adult Literacy rate (%) 85.0 94.7 84.0 96.5 95.2 90.1
95.1
Combined first, second and third levelgross enrolment ratio 64 59

80 79 77 70 66
(%)
Life expectancy at birth (years) 65.1 68.8 66.8 72.9 74.9 72.2 76.0
Human Poverty Index (HPI-1 rank) 46 29 19 - 6 13

4
Source: Human Development Report. UNDP (1999).
32
Table 6-2
Intel Wages Sept. 97 to Sept. 99 (Millions
of Dollars)
Sept 97 Sept 98
Sept 98 Sept 99
Wages 3.73 16.35 Benefits 1.77 9.24
Total 5.50 25.59
Source: PROCOMER. Annual Report of Intel Operation.
33
Table 6-3
Intel Employment
Sept. 97 to Sept. 99
Sept 97 Sept 98
Sept 98 Sept 99
Professional Employees 359 562 Technicians 80
554
Operators and Ohters 2 1101
Total Employees 441 2,217

Source: PROCOMER Annual Report of Intel Operation.
34
Table 6-4
Manufacturing Sector
(dollars per month)
Wage per employee Sept-98 Sept-99
Intel 562 615
Total Sector 389 406

Source: Own estimates with data from PROCOMER .
35
Table 6-5
Intel, Lower Bound on
Domestic Purchase
1998-1999
(million dollars)
1998 1999
Services 14.5 17.5
Others 4.9 5.7
Total Purchases 19.4 23.2

Source: Own estimates with data from PROCOMER
36
Table 6-6
Intel Investment
Dec. 1997 – Dec. 1999
(Millions of dollars)
Dec-97 Dec-98 Dec-99
Land 16.4 5.8 1.4
Buildings 36.5 50.6 15.1

Machinery 20.3 156.7 72.1
Transportation 0.0 0.0 0.0
Equipment 1.3 4.3 2.5
Total Investment 74.5 217.4 91.0
Source: Own estimates with data from PROCOMER.
37
Monthly Index of Economic Activity

10
C 8
h
a 6
n
g
e 4
r 2
a
t
0
e
-2
Dec Dec Dec Dec Dec Dec Dec
93 94 95 96 97 98 99
38
Graph 6-2
Real GDP Growth
10%
9.0% 9.0%
9% With Intel Without Intel
8.0% 8.0%
8%
G 7% 6.3% 6.3%
r 5.8% 5.9%
6% 5.1%
o 4.9% 4.9%
5%
w 4.0% 4.0%
t 4%
3.0%
h 3%
2%
1% 0.3% 0.3%
0%
1992 1993 1994 1995 1996 1997 1998 1999
39
Table 6-7
INTEL, Trade Balance
1998 -1999
(Millions of
d ll )
Imports
Year Exports Total InputsAssetsCapital Others Balance
1998 987.2 781.7 616.8 158.2 6.7 205.5
1999 2,558.6 1,062.6 983.8 73.0 5.8 1,496.0

Source: PROCOMER
40
Graph 6-3
90% Openness ratio 83% 83%
80%
70%
P 70% 67%
62% 61% 63%
e 60%
r 60% 57%
c
e 50%
n
t 40%
a
g 30%
e
s 20%
10%
0%
1991 1992 1993 1994 1995 1996 1997 1998 1999
41
Graph 6-4
90 Composition of Exports
P 80
T
e
o 70
r
t
c
e
a 60
l
n 50
t
E
a 40
x
g
p
e 30
o
s
r
t
20 Natural Resource Based
o
s 10 Manufactures Goods *
f
0
1990 1991 1992 1993 1994 1995 1996 1997 1998 1999
*Includes industrial and free-zone exports.
42
Table 6-8
INTEL Exports and Imports 1998 - 1999
American Countries
(Millions of Dollars)
1998 1999
Country
Exports Imports Balance Exports Imports Balance
Barzil 1.8 0.1 1.7 4.5 0.0 4.5 Mexico 14.2 1.3 12.9 60.4 1.6 58.8
United States 409.2 718.8 -309.6 1,391.2 988.6 402.7
Canada 1.1 0.7 0.4 5.7 0.0 5.7

Source: PROCOMER
43
Table 6-9
Asian Countries
1998 1999
Country
China 0.4 0.0 0.4 0.6 0.0 0.6 Korea 22.2 0.0 22.2 35.0 0.0 35.0 Japon 32.9 30.3
2.6 104.2 49.7 54.5 Malaysia 114.5 5.5 109.1 62.8 6.0 56.8 Hong Kong 31.4 0.1
31.4 28.3 9.9 18.4
Phillipines 5.8 8.4 -2.6 30.5 0.0 30.5

Source: PROCOMER
44
Table 6-10
European Countries
1998 1999
Country
Germany 37.0 0.5 36.5 1.0 0.1 0.9 Switzerland 0.4 0.0 0.4 0.0 0.8 -0.8
United Kindom 100.4 0.7 99.7 320.1 0.0 320.1 Ireland 11.7 0.0 11.7 36.7 0.1 36.6
Italy 16.1 0.7 15.4 0.0 0.0 0.0
Source: PROCOMER
45
Table 6-11
Composition of Costa Rica's Exports 1999
Without With
Intel Intel
USA 49 51
México 2 2
Canada 1 1
Rest of America 26 16
European Union 18 21
Rest of Europe 1 1
Asia 2 6
Others 1 1
100 100
Source: PROCOMER
46
Table 6-12
Intel Suppliers in the Survey by Activity
Frequency Percentage Cumulative percentage
Packing 4 9,3 9,3
Aluminum 4 4,7 14
Lithographic products 9 20,9 34,9
Products and reparation of 5 11,6 46,5
metalmechanical parts
Furniture 3 7 53,5
Gas bottling 2 4,7 58,1
Computing Products (software, 2 4,7 62,8
hardware)
Architecture 2 4,7 67,4
Office appliances 3 7 74,4
Electronic equipment 2 4,7 79,1
Products for industrial maintenance 2 4,7 83,7
Painting and construction 2 4,7 88,4
Plastic 1 2,3 90,7
Uniforms 1 2,3 93,0
Other appliances 1 2,3 95,3
Optics 1 2,3 97,7
Security 1 2,3 100,
Total 43,0 100,0
Source: Authors´ calculation from survey results.
Graph 6-5
Suppliers of goods to Intel

Percentage of sales to Intel out of total sales in 1999.
47
From 50 to 100
From 10 to less of 50
From 2 to less of 10
Fom 1 to less of 2
From 0 to less of 1
0 10 20 30 40 50
% of Enterprises
48
Answer the following questions:
1. Summaries the main focus of the case study.

2. Justify the reasons for Intel’s location selection. Do you support the location decision? And
why?
3. Perform a short SWOT analysis for Intel’s Costa Rica expansion.
4. Discuss at least five Advantage for Costa Rica as a hosting country, be specific to what is
mentioned in the case.
5. Critique the Backward-forward linkage, how is it linked to institutional reform?
49

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What is the main focus of the case study?

What is the main focus of the case study?

What factors did Intel consider in selecting Costa Rica as its location?

What factors did Intel consider in selecting Costa Rica as its location?

Chapter 6 Intel: A Case Study of Foreign Direct Investment in Central

Felipe Larraín, Luis F. López-Calva, and Andrés Rodríguez-Clare1

The attraction of foreign direct investment (FDI) constitutes a fundamental element to

Intel’s decision making

[insert table 6-1 here]

Strengths and weaknesses

3. The Impact of FDI on the Host Economy: Some Theoretical Considerations

• macroeconomic effects, such as the impact on exports and imports, on GDP, on

on aggregate productivity in Kenyan and Philippine manufacturing (Pack 1987).

Reform and training externalities

4. Intel in Costa Rica: A Whale in a Swimming Pool?

Wages and employment

[insert here table 6-2]

[insert here table 6-3]

[insert here table 6-4]

[insert here table 6-5]

[insert here table 6-6]

5. Macroeconomic effects of Intel

the 12month average for the change rate of previous 12 months.

[insert here graph Monthly Index of Economic Activity]

[insert here graph 6-2]

[insert here table 6-7]

[insert here graph 6-3]

[insert here graph 6-4]

[insert here table 6-8]

[insert here table 6-10]

[insert here table 6-11]

Effect on the Labor Market and Other Inputs Prices

Training and the Intel Associate Status

Informal transmission of knowledge spillovers

6. Linkages: back to suppliers

The different suppliers and their reactions

[insert here table 6-12]

In terms of training externalities, 35% of the providers of services declared to have

[insert here graph 6-5]

Supporting the development of suppliers

In the program carried out previously by CINDE and PROCOMER, successful

Institutional Reforms and the Signaling Effect

An important component of the effect of FDI in host countries, as discussed

Available information supports the existence of positive externalities generated by

Summary of Benefits Under the Costa Rica’s Free-Zone Incentive Package

Source: Spar (1998).

1996 1997 1998 1999 *

A. Goods -249.2 -497.6 -399.0 632.1

Imports FOB -4,023.3 -4,718.2 -5,937.3 -5,983.9

Travels 374.0 394.3 504.6 583.2

Others Services -102.9 -65.1 -57.4 -42.0

Income -184.6 -249.0 -468.5 -1,685.2

A. Capital Account 28.1 0.0 0.0 0.0

B. Financial Account 39.4 508.5 547.7 1,063.7

Portfolio Investment -21.5 74.4 -85.6 232.5

Other Investment -360.3 31.6 26.5 252.9

V. Total Balance of Payments 0.0 0.0 0.0 0.0

Arrow, K. 1999. “Knowledge as a Factor of Production.” Paper Presented at the ABCDE