The term Nearshoring refers to the mechanism or process through which a company transfers its business processes (e.g., services, manufacturing) or technology to third countries located in destinations close to the contracting country.
This is opposed to the concept of Offshoring, which consists of relocating part of the services or manufacturing to other countries located in distant destinations. Among the most common offshore destinations are China, Malaysia, and India, places where wages are lower and offer a more profitable production cost, reflected in more competitive pricing for companies.
However, offshoring is not proving as profitable as expected for various reasons, such as the increased cost of human capital in these countries, poor legal and regulatory infrastructure, security and intellectual property risks, as well as time differences, culture, and language. At present, the Covid-19 pandemic and the container crisis highlight another disadvantage of offshoring, which is the significant increase in the times of receipt of goods and logistics operations, as well as logistics costs because of the remote locations.
Consequently, companies are more commonly implementing the nearshoring strategy with some service and production companies replacing their offshoring practices or adding nearshoring as well to diversify the risk and have another sourcing alternative.
Proximity also enables a reduction in time zone differences, fewer cultural discrepancies, a higher level of control in decision-making processes, a reduction in transportation times and costs, and more efficient contact between home offices and outlying companies.
Such benefits allow Costa Rica to position itself as a key nearshoring destination for Canadian and US companies. The country’s competitiveness and the advantages it offers creates a situation that must be taken advantage of to increase Foreign Direct Investment (FDI) and reactivate the country’s economy after the contraction imposed by the pandemic.
To this end, Costa Rica has an excellent geographical location, with nearby sea, air, and land ports that allow the rapid movement of merchandise. Moreover, the country is a signatory to more than 14 free trade agreements, including the United States, China, and Europe, which facilitates trade with such indispensable trading partners while lowering costs. Costa Rica has also enacted an attractive and strengthened system of tax incentives, such as the Free Trade Zone system, which is constantly being reformed to adapt to the needs of the beneficiaries and increase the country’s competitiveness, as well as the regulation of different exemptions granted by law.
Of added significance, Costa Rica is the fourth member of the Organization from the Latin American and Caribbean region to be invited to join the OECD, which harmonizes legislation and best practices in areas such as competition, statistics, fight against bribery, fiscal transparency, and environment. In addition, a reform to the General Customs Law is in serious discussion, which has among its objectives the strengthening of customs control, the fight against smuggling, and the facilitation of international trade.
Moreover, Costa Rica enjoys a renowned quality of life and economic, political, and legal stability. It has a highly-skilled workforce, is literate in the English language, and has high educational standards.
However, even though Costa Rica has come a long way in attracting Foreign Direct Investment through its great efforts made within both the public and private sectors, it faces strong competition in the region. Therefore, the country must identify the shortcomings it has and work on them to become even more competitive and meet the ever-changing requirements of growing companies.
Of urgency is the need to speed up the necessary paperwork for the establishment and operation of companies in the country, both inside and outside the Greater Metropolitan Area (patents, operating permits, land uses, construction, etc.). Key elements to speedier permits and bottom-line results include inter-institutional coordination, digitization of processes, digital education, the attraction of international talent (greater flexibility and immigration incentives), improvements in connectivity infrastructure, and proper and timely development of teleworking, as the pandemic has shown.
Since the growth of nearshoring induces strong competition among countries to attract or retain corporations with overseas headquarters, Costa Rica must take the necessary measures and actions to promote the economic, social, and cultural development that the adequate attraction of Foreign Direct Investment requires.