New Free Zones Focus on Service Industries
The Zeta Group this week inaugurated construction of a free zone in Cartago that it expects to attract close to $60 million in investment. That free zone joins two other large-scale free zone developments announced in the past two months by the company Free Zone & Business Park Developer (FZBP).
The projects aim to attract millions of dollars of investment and create tens of thousands of jobs. But they also highlight the economy’s continuing move away from manufacturing investment in favor of service, vending, and administrative businesses.
At the moment, 57% of businesses in Costa Rica’s 23 free zones are dedicated to manufacturing, but Timothy Scott, executive director of the Costa Rican Association of Free-Zone Businesses (AZOFRAS), says that is changing. The change is partly due to a World Trade Organization (WTO) decision in 2001 against government incentives granted to export manufacturers.
Mostly, however, it reflects the changing demographics of the country as Costa Rica continues to transform itself into a destination for more high-tech service outsourcers.
“Most of the companies that have entered the country in recent years aren’t manufacturing, but service,” he said.
Zeta Group’s new free zone, for example, is an expansion of its CartagoIndustrial Park free zone, and it sits alongside garment manufacturers such as Hanes and Levi Strauss. Yet the new free zone will be called TechnoPark, and the businesses it seeks to attract are call centers, technical support centers, and other computer and communications businesses that focus on high-tech service.
“The tendency of the country is toward more specialized labor,” said Zeta Group Vice President Cesar Zingone. “We’re responding to that.”
Techno Park has already attracted $4 million in investment. Zeta expects the 15-hectare plot to host 25 companies within its total floor space of 100,000 square meters.
The park is expected to generate 5,000 jobs in the short term, and Zingone said the free zone could employ 8,000 to 9,000 workers within five years, depending on the performance of the economy and the result of September’s referendum on the Central American Free Trade Agreement with the United States (CAFTA). Currently, Zeta Group’s free zones in Cartago, Alajuela and Heredia employ a combined 14,000 workers.
President Oscar Arias was the keynote speaker at the TechnoPark inauguration Tuesday, and other Cabinet members, lawmakers and business chamber representatives also attended. Workers from the other businesses in the industrial park crowded around the outskirts waving “Sí al TLC” signs, turning the event into something of a pro-CAFTA rally.
“You all have jobs,” Arias told the crowd as he made his pitch for the U.S. free-trade agreement, or tratado de libre comercio. “The question is, where are your children going to find jobs?”
Later, Arias cut the ribbon for the new park.
It was in some ways a repeat of a scene that took place April 24 in El Coyol de Alajuela, at the inauguration of FZBP’s new free zone project northwest of San José. At that ceremony, Arias laid the first stone, joined by Foreign Trade Minister Marco Vinicio Ruíz.
If all goes as planned, that project will in 10 years become the biggest free zone in Costa Rica, with more than $200 million in investment and upwards of 30,000 jobs. And like TechnoPark, Coyol is aiming for the service sector.
BeamOne is one company that’s already committed to starting operations in Coyol during the first quarter of 2008. The U.S. company specializes in sterilizing medical equipment using electron beams. The implements are imported, sterilized, then exported.
“We found that there is a market of opportunity for companies that are in the service industry,” said Carlos Wong, the manager of the Coyol free zone, which will cover a total of 107 hectares.
Last month, FZBP announced plans for another free zone, this one in San José between Calle Blancos de Coicoechea and Barrio Tournón. The East Free Zone will be located in the old Durman Esquivel factory, which FZBP is remodeling extensively.
FZBP is expecting the project to attract $10 million and create 4,500 jobs in call centers, business processing and administrative companies.
TeleTech – an all-purpose office outsourcing company – is set to start operations there in 30 days, while TechData – a Fortune 500 information technology company – will begin work in August with 25 employees.
“We’re expecting this country will continue growing as it is,”Wong explained.
According to statistics from the Foreign Trade Promotion Office (PROCOMER), in 2006 free zones accounted for $4.31 billion in product exports, 52.6% of all Costa Rica’s exports. That was an increase of almost 17% over 2005 numbers, an indication that free zones continue to be popular.
Most of that growth, however, was from tech products related to Intel. Textile and leather manufacturing was down, and many other manufacturing sectors operating from free zones grew by less that 10%.
The export of business and information services from free zones, on the other hand, was up 21.46% in 2006, to $532 million from $438 million, according to estimates from the Central Bank.
A decision by the WTO in 2001 stated that member countries must stop giving favorable tax treatment to export manufacturers.
Costa Rica obtained an extension of the compliance deadline until 2010, and legislators are preparing to announce the contents of a law that will address the WTO’s concerns, according to Foreign Trade Minister Marco Vinicio Ruíz.
Previous manifestations of that law have proposed levying a 15% income tax on free zone manufacturers.
The WTO’s decision, however, does not apply to agricultural free zones. Neither does it apply to service and administration businesses operating in free zones.
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