Costa Rica backs people power as Industry 4.0 challenges loom

Costa Rica has come a long way since its abundant agricultural products made up about 90% of its exports in the 1950s. The country opened up to foreign trade and investment three decades later, paving the way for the development of flourishing manufacturing and services sectors, which increased in sophistication over the years.

Today, medical devices are the country’s single largest export product, generating more revenues than bananas, pineapples and coffee combined, and the country’s diverse economy is well integrated in global value chains.

A transformed economy

The transformation of Costa Rica’s economy, combined with the establishment of functional basic services such as universal primary education, healthcare and pensions, bore fruit across the board, enabling the country to achieve upper middle-income status, according to World Bank figures, and become a major recipient of foreign investment in Central America.

However there are concerns that Costa Rica may become a victim of its own success as about half of the country’s jobs – many of which have been created in the past 20 years – are at risk of automation, adding pressure to a job market where unemployment is already a main cause of concern for the population.

The authorities face an uphill challenge, but are ready to double down on the development of human talent that has proved a key element in Costa Rica’s recent success, to keep it at the head of the technological frontier and make 'Industry 4.0' an opportunity, not just a challenge.

Challenge or opportunity?

“We have to raise awareness and prepare our talent for the fourth industrial revolution,” says Jorge Sequeira, managing director of Costa Rica’s investment promotion agency Cinde. “It’s a big challenge because almost 100,000 existing jobs in multinational corporations might be automated because of the rise of robotic process automation [RPI] in the services sector and traditional robotic [activity] in manufacturing.”

Costa Rica features among 15 developing economies identified by the World Bank as having job markets most vulnerable to automation: as many as 68% of local jobs could be at risk of automation, although this drops to 49% if adjusted for slower technological adoption. Many of the most vulnerable jobs are in advanced and basic manufacturing, as well as in services such as IT and business process outsourcing, which has created thousands of jobs over the years and emerged as a solid, new engine of growth for the country.

Despite the magnitude of the challenge, Mr Sequeira sees the glass as being half full, saying: “It’s a challenge, but also an opportunity. In a country of 4.9 million people, we have 62 universities [five public universities and 57 private ones], a lot of technology, and we believe that Costa Rica can be on the winning side of this revolution. We want to become a centre for innovation and development of these solutions, and we believe we have the human talent to achieve that.”

Within this context, Cinde is now promoting and supporting the development of new sectors that leverage existing talent and knowledge, such as engineering RPI solutions within the same country, cybersecurity, data analytics, creativity sectors, as well as increasing recent successes such as the development of the life science and electronics sectors. 

STEM shortage?

Yet the country's education system is not providing much talent in the STEM subjects. Science, technology, engineering and mathematics accounted for only 16% of university graduates in 2016 despite being the main gateways to jobs in advanced manufacturing and high-value-added services, according to figures from Cinde and the National Deans Council. 

Besides, the country invests about 0.5% of its annual GDP on R&D, below the Latin American average of 0.75%, according to figures from the Inter-American Development Bank. This falls a long way short of the 2.5% OECD average.

“Current programmes in support of science, technology and innovation are too small to have a sufficient impact and trigger a change in Costa Rica’s innovation capabilities,” said a 2017 OECD report.

FDI leverage

Beyond targeted education and R&D policies, Costa Rica can leverage its large endowment of accumulated FDI to increase innovation across the economy. FDI to GDP in the country stood at 5.6% between 2000 and 2015, with an increasing part of FDI flows concentrated in advanced manufacturing and services sectors operating under in a free-trade zone regime. At the end of 2016, the country’s total stock of FDI stood at $34.3bn, the highest level in Central America and the Caribbean after Mexico and Panama, according to figures from Unctad.

This broad base of foreign stock has been a major force behind the development of a base of local suppliers with above-average skills and capabilities. A 2017 study by the OECD found that suppliers of foreign companies in the manufacturing and services sectors are, respectively, about 8% and 6.4% more productive than their peers in the domestic market, which provides solid evidence for the positive spillover from FDI in the form of technological adoption, corporate governance and talent development.

However, even though the participation of local companies in the supply chain of foreign multinational firms operating in Costa Rica has been increasing, the economy still shows signs of a duality dividing those firms who are incorporated in global value chains, and those who struggle to meet the quality and quantity requirements of foreign companies, and keep scoring poorly in terms of innovation and talent development.

Prepare for revolution

Growing the backward links between foreign and domestic companies has thus become a key focus for public authorities in Costa Rica, including Cinde, in order for them to make the most of the country’s FDI appeal, increase productivity across the board and prepare the local ecosystem for the challenges of the Industry 4.0 revolution.

With unemployment running at 10.3% in the first quarter of 2018 and topping the population’s list of concerns – as shown by polls published ahead of presidential elections that took place in April – automation and education may well become an even more important focus area for local authorities.

Costa Rica has already proved it can successfully embrace a deep transformation of its economy, which prompted the development of sectors such as medical devices and electronics. A new revolution is now taking place, bringing with it new challenges that in turn could become opportunities, should local policymakers embrace them with the same level of dexterity as they showed in the past.