Unit 4: FDI and developing countries - over reliance?

This is an excellent piece which looks at the advantages and disadvantages for countries that rely on FDI & multinationals.

This Economist article returns to a topic from way back in 2000, when the multinational company Intel had recently embarked on a significant investment in Costa Rica. What would happen to the relatively poor Central American economy when the giant arrived?

Fast forward to 2014 and Intel have announced that they are leaving. Cue some similar questions: what effects have been felt? And what impact will Intel’s departure have?

Back in 2000, the Economist reported that when Intel named a new boss for its Costa Rica operation, the president of the tiny country joked that the new manager's job was more important than his own. Intel had begun to transform the economy in 1997. GDP grew and exports boomed, giving Costa Rica a trade surplus for the first time since 1986.

When the value of the Intel factory's production almost tripled, the rest of the economy grew more modestly, by around 3%. Farming, traditionally the mainstay of the economy, suffered from low prices and some Costa Ricans worried that their country now had a “dual economy”, and was swapping one form of economic dependency for another.

“Fifty years ago we depended on coffee and bananas; today we depend on Intel,” the central bank president complained. And it’s worth remembering that although GDP boomed, the impact on GNP (national income) grew by only 2% because of the outflow of profits.

The article argued that Costa Rica had some inbuilt advantages in handling Intel: a democratic tradition, respect for the rule of law, and a well-educated workforce. Such factors led Intel to choose Costa Rica for its only factory in Latin America. The business went on to help improve Costa Rica's infrastructure and other foreign investors followed Intel.

What is the view from 2014?

According to the article, by the end of the year 1,500 jobs will have been lost as Intel pulls out of Costa Rica. Intel’s operations in the country are worth around $2 billion a year, making up about 20% of the country’s exports. The firm accounted for 11% of net foreign direct investment in 2000-12. Intel says it will hire another 200 staff to work in its engineering and global-services units in the country, which currently employ around 1,200 people. Nonetheless, one economic adviser to the incoming government, estimates that the closure of the microchip factory will cause a drop in Costa Rica’s GDP of 0.3-0.4% over the next year.

Intel’s arrival helped Costa Rica to develop a lively high-tech cluster which includes companies such as Infosys and Hewlett Packard (which last year announced that it was moving some of its Costa Rican jobs to India). The worry is that just as Intel’s arrival triggered an influx of smaller firms, its departure could cause them to leave.

Nor is technology the only industry feeling the squeeze. Hours after Intel announced its departure, Bank of America said it would close its Costa Rican operations as part of a global restructuring programme, laying off 1,400 workers.


So few celebrations that the MNC is leaving: instead it’s a revealing insight into some of the problems created up by a dependency on foreign firms for the development of a small, relatively poor economy.