Besides stunning landscapes, abundant natural resources, folklore, music and a joyful approach to life, Costa Rica and Ireland have in common openness to internationalization. Both countries illustrate —with different strategies—the importance of the macroeconomic context, institutions, and the trade regime to successfully attract foreign direct investment.
Despite the near consensus that openness and diversification can be beneficial for economic growth and even with the improvements noted in recent years in Latin America and the Caribbean, the picture the region presents is not fully satisfactory.
|Trade, Vertically Linked Subsidiaries and Level of Development, Latin American and Caribbean Countries, 2010|
Openness to trade can foster growth by making it easier to import goods that embody new technology, by reaping economies of scale, and by facilitating the “learning by doing” process through exporting.Export diversification, in turn, reduces sensitivity to sector-specific shocks. However, the success of policies to favor internationalization for attracting foreign direct investment (FDI) relies not only on the implementation but also on the design of those policies.
In this regard, most countries around the world offer incentives to attract multinational companies as part of their investment promotion initiatives. Fiscal incentives such as tax holidays and breaks lower certain taxes on a temporary or permanent basis (such as decreasing the base rate of the corporate income tax) or even exempt companies from certain taxes. Tax policy and investment incentives can affect the location of multinational companies across countries and within countries. Thus, while the use of incentives can be a tool for attracting FDI, implementing such incentives requires dealing with challenging issues like their magnitude, timing, and balance with the role of the fundamentals.
Beyond incentives, the Costa Rican and Irish experiences illustrate the importance of political, social, and macroeconomic stability; rule of law; low levels of corruption; relatively high levels of economic freedom, especially regarding trade and capital flows along with a pro-business environment; appropriate transport logistics; an attractive location, quality of life; a system of rules and institutions conducive to innovation and, importantly, a labor force with relatively high levels of education and good knowledge of English (in the case of Costa Rica is the result of continuous investments in education over several decades).
On top of this, all accounts of both experiences highlight the crucial role played by the country’s Investment Promotion Organizations (IPO).
The role of IPOs in attracting FDI is just one example of a new generation of industrial policies explored in the IDB’s latest flagship publication, Rethinking Productive Development.