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Microprocessor giant, Intel made an announcement of its plan to build a assembly and testing facility in Latin America in 1996, November. Seven Latin American countries showed their interests to attract this massive investment into their own countries. However, after elaborate and thorough research taken Intel's site selection team, the company chose Costa Rica as its fourth overseas A&T plant location beating everyone's expectation. This paper will basically cover the process Intel off-shored its facility to foreign country, including market situation in 1990s, reasons for choosing Costa Rica, followed by the impact this huge company had on tiny country. Notably, it will be explained by linking to Dunning's 'Eclectic paradigm', especially focused on location specific advantage.
2. company profile
Intel Corporation is the world's largest semiconductor chip maker and it is providing advanced technology solutions for the computing and communications industries. This company makes a wide range of products such as flash memory, motherboard chipsets, network interface card developed at various levels of integration but mainly, microprocessors found in most personal computers. (Intel's annual report)
The company was established in 1968 as Integrated Electronics Corporation in Santa Clara, California, USA. Founded by semiconductor pioneers Robert Noyce and Gordon Moore, Intel first developed SRAM and DRAM memory chips which were the majority of its business until the early 1980s. However when Intel developed the first commercial microprocessor chip in 1971, this became their primary business with the success of the personal computer.
It also created one of the first microcomputers once, but it shifted its focus to microprocessor due to increased competition. As its business grew so quickly, it set up its first overseas plant in Malaysia in 1972, and several additional plants in worldwide since then, they announced the plant to build its assembly and testing plant in Latin America in 1996. Now, Intel is 9th global brand in the world in 2009 according to Interbrand Magazine issued in 2009.
3. Background for the Intel's plan
3.1 market situation in 1996
Microprocessors are the most important part, playing a role as brains in not only personal computers, but also in cars, mobiles, anything which are programmed to perform particular tasks. With its significance, the massive semiconductor industry had been grown with over $120 billion in sales in 1995, and it is anticipated to grow 20% per year. Since Intel Corporation invented the first microprocessor in 1971, it kept leading the semiconductor industry, having more than 85% of microprocessor sales in the world in 1996.
To maintain its position as a key player in the field and remain innovative, the company never neglected investment in developing state-of-the-art microprocessors and introduced new ones faster than its competitors. Intel's former CEO, Andy Grove, described this fierce industry as "only the paranoid survive."
As can be understood in the famous Moore's Law which was devised by Gorden Moore, one of Intel's founder : "Driven by competitive market forces, the power of microprocessors will double every 18 months, the speed of semiconductor industry is so fast. Given the rapid growth of this industry, the need to build its new plants at a rate of one almost every nine months emerged." Obviously, it is very expensive especially when having to keep the high investment in R&D at the same time. Clearly, it was not a good choice to pass these costs to on the customers as they also had to compete with strong competitors who could easily copy Intel's designs at lower prices than Intel could. Apparently, Intel needed to locate their new plants in other places that could offer much lower cost such as labour cost than the United States.
In addition to the need for lower costs, there was need to diversify its operations into various regions. Since most overseas plants of Intel were concentrated in Asian Pacific region, such as Malaysia, China and the Philippines, it caused a few problems. For instance, the plant in Malaysia encountered problems such as a shortage of skilled technicians, increasing salaries, and difficulty in training employees. More importantly, due to the Asian crisis in late 1990s, the demand in the region decreased sharply and thus resulted in temporary shut-down of three plants in the region. As explained in Caves work introduced 1996, saying "Diversification of production across frontiers is guided by the usual principle of risk aversion. Diversification can take the form of product or space diversification. In the latter case, production in several countries can reduce risks." It was necessary for Intel management team to seek to other regions to site their facilities.
3.2 Decision criteria of site selection
Site selection process of Intel was very elaborate and exquisite because it was microprocessors that they were making. The process was very complex and sophisticated, requiring certain location specific advantages such as availability of high skilled labour, absence of labour unions, good infrastructure, electrical power supply and special incentives guaranteed by government.
As an emerging region and market and proximity to its head quarters, Latin America caught an eye of Intel and Intel finally made an announcement to set up its assembly and testing facility in one of the Latin American countries. Given the amount of Intel's investment, estimated between $300 million and $500million with approximately 2,000 initial employment, the plan was very tempting for most of the Latin American countries. At the end, four countries, Brazil, Mexico, Chile and Costa Rica were competing to lure this massive investment of multinational company.
4. Decision to invest in Costa Rica
4.1 Why off-shoring rather than out-sourcing?
According to Dunning's article published in 1980, there are three conditions for foreign direct investment to take place, suggested by Dunning in his 1980 article.
- The enterprise concerned must possess 'net ownership advantages vis-à-vis firms of other nationalities in serving particular markets' (Dunning, 1980:275)
- The enterprise must have benefits from internalizing the use of resources in which it has an advantage rather than selling them on external markets, e.g. via licensing.
- The country where the FDI takes place must offer special locational advantages to be used in conjunction with those deriving from ownership and internalization.
Intel has several ownership advantages as it had undoubtedly superior technical knowledge, leading the microprocessor industry with 88% of market share by revenue in 1996. While followed by its biggest competitor Advanced Micro Devices(AMD) with 12%, it could be still said that this market was almost monopoly. Based on its size and sales of the firm, it also had well deserved international operation experience as the planned plant would be its fourth.
By producing internally, it can also avoid risks of leaking its special high technology to its competitors which will be immense damage for this high technology based firms by losing its firm specific advantages. On top of that, it is possible to reduce transaction costs incurred when using external markets. In this sense, this internalization advantages can be closely related to the firms owner ship advantages.
For location specific advantages, I will discuss in depth.
4.2 Why Costa Rica?
It is interesting to know that Costa Rica was actually the final candidate among four countries on Intel's short list. However, when it comes to attracting foreign investment, Costa Rica had many advantages. In this paper, it will be summarised in four dimensions : financial provision, labour skills and availability, business environment and strategic location
For financial provisions, Costa Rica had already been providing very generous incentives to foreign companies which were located in its eight industrial parks with free trade zone status. This attractive package of incentives includes tax exemption and duty-free importation of raw materials, as well as the right to have product and capital flowing in and out of the country without any restrictions(free profit repatriation). These are all under Costa Rican Free Trade Zone Scheme, which made its economy wide open to foreign investors.
Costa Rica's standard investment incentives and tax policies
- 100% exemption on import duties on raw materials, components and capital goods
- 100% exemption on taxes on profits for eight years, and 50% on the following four years
- 100% exemption on export taxes, local sales and excise taxes, and taxes on profit repatriation
- 100% exemption on municipal and capital taxes
- No restrictions on capital repatriation or foreign currency management
- Fully expedited on-site customs clearance
- Ability to sell to exporters within Costa Rica
- Ability to sell up to 40% in the local market with exemption from sales tax
However in here, it is important to note that these incentives already existed before Intel arrived. That is, these were not special treatment for Intel, which Intel was also happy about. Because, if it had been special incentives for Intel, these might have changed whenever the policy or the government changed. For this reason, Intel wanted transparent and legislative incentive policy.
Labour skills and availability
When considering at the educational level of workforce, Intel's worldwide site selection team noticed that the level of English-language was much higher in the general population, than in other Latin American countries. Thanks to the national reform since 1948 which improved social welfare, education and health care for the populace, the general population was clearly well educated. Having English speaking workforce was a big advantage for Intel considering the fact that they had to train local workers in English, especially since most technical manuals were in English.
As mentioned ahead in decision criteria, the aspect of labour union was important for Intel as powerful labour union can affect the operation of the plants. However, when considering the fact that only about 7% of Costa Rica's private-sector workers belonged to labour unions, this issue didn't seem to be a problem for Intel.
Most importantly, wages in Costa Rica were much lower obviously in comparison with those in the United States, even for technical workers or skilled technicians. And this was also true of the other countries on Intel's short list, with the exception of Chile
When it comes to business environment, Costa Rica had preserved good reputation for political stability, relatively corruption free environment and democratic government. Surrounded by other countries that had been struggled in political confusion and war for much of the 1980s, Costa Rica, in contrast, had been stable and democratic since they abolished its military and reformed its status since 1948.
Furthermore, Costa Rican government was so enthusiastic for attracting foreign investment in Costa Rica. Especiallym Costa Rica's president of that time, Jose Maria Figueres, was very interested in promoting high-technology investment in Costa Rica, having a dream of making Costa Rica a viable country for high-technology investment. As he explained in his speech :
"We wanted to incorporate Costa Rica into the global economy in an intelligent way. We needed a national strategy not based on cheap labor or the exploitation of our natural resources. We wanted to compete based on productivity, efficiency and technology . . . . the foreign investment attraction strategy had changed. We wanted to attract industries with higher value-added, that would allow Costa Ricans to increase their standard of living."
When the project of Intel was announced in 1996, all under the direction of the Costa Rican government and the presidency, seven institutions took part in the process on the side of the government right away. More importantly, CINDE (Coalición Costarricense de Iniciativas para el Desarrollo), which is a Costa Rica's investment promotion agency played a very crucial role in the process. For example, they tried to gather information as much and quickly as they can and prepared the answers for the questions the Intel's site selection team might have when they were visiting Costa Rica, and it was more than enough to impress them deeply.
Last but not least point for business environment is that, Costa Rica had very strict intellectual property law which was very crucial to high-technology business such as Intel.
Intel planned to export most of the products assembled and tested at the plant in Costa Rica by air, mostly to the United States and there was need for executives in a parent company to travel to its off-shoring plants often for start-up phase, distance from headquarters was one of the main concern for Intel. Since Costa Rica was very proximate and only three hours away from the US, it could be seen as strategic location in terms of transportation cost.
In addition to this, Costa Rica also shares the same time zone with its headquarters in the US, which enabled them to achieve direct control from the parent company which means managers in Costa Rica plants do not have to wait until next morning or for long time when they face problems.
4.3 Drawbacks of Costa Rica
While Costa Rica seemed very attractive for investment considering all the advantages explained above, there were a few problems as well. Since it was such a small country with only 3.5 million populations, Intel was worried if it would overwhelm the tiny country at first, "it was like putting a whale in a swimming pool," said Bob Perlman, Intel's Vice President. However this issue did not become a concern as they planned to export most outputs to serve other market.
Another concern was that, although roads in Costa Rica and San Jose airport were in great shape due to good infrastructure, there were not enough daily flights to various areas. After long discussion between Intel and the Costa Rican government, the government decided to carry out 'Open Skies' programme which issued more licenses and attracted many international airlines to use its airport.
Since initial drawbacks were all resolved by the Costa Rican government's effort, Costa Rica was finally chosen as offshore destination by Intel Corporation.
5. Intel's impact on Costa Rica
Since the arrival of global giant in Costa Rica, Intel enormously influenced on Costa Rica in every dimensions without any doubt. In economic dimension, it can be shortly said that Costa Rica's economy was shifted from production of cash crops to cash chips. Previously, Costa Rica was well known for coffee and banana, representing 80% of total exports in 1985, but in 1999, the next year they opened the plant in Costa Rica, exports of Intel only, accounted for 36% of the nation's total exports according to Central Bank of Costa Rica, Customs, Procomer.
Most important thing to note is that, this vest investment enabled Costa Rica to create a friendly investment climate, thereby resulting in large economic growth. Intel Corporation was undisputedly huge and creditable multinational firm, which means that becoming Intel's off-shoring destination is receiving 'stamp of approval' that can work world widely. After Intel arrived in Costa Rica, a massive amount of associated and non-associated investment of other firms followed and now Costa Rica ranks third as the most competitive offshore country right behind India and China.
Moreover, there were various effects caused by backward linkages as it influenced hugely on Costa Rica's education system, workforce, logistics area and etc. Not only Intel suppliers in Costa Rica, but also other domestic companies could learn Intel's special management and operational skills, and changed their organizational practices. Thanks to the improvement on daily flights from San Jose airport, large international logistics firms such as Fedex, managed to enter Costa Rican market. Additionally, owing to Intel's support and investment in educational programmes in Costa Rican public universities, it is generating highly skilled and qualified workforce.
As it is pointed out in Cantwell's theory(1989:207)
"Successful innovators tend to invest in innovation activities in several centres/countries. As they do so, their investment generates spillover effects to the location and the industry, thus encouraging more investment and innovative activities by other firms. Each innovating firm brings external benefits to the locality in which it invests. Conversely, the investors benefit from the favourable technological environment that develops in the locality."
6. Current Situation of Intel in Costa Rica
Due to the global downturn, Intel Corporation is also going through tough time, dismissing 6,000 employees and shutting 5 plants down as Intel's total sales dropped 23% in a year and profits 90% during the last quarter of 2008. Luckily, Intel in Costa Rica has escaped this turmoil. Yet, Intel in Costa Rica is also tightening its belt to cut cost as much as they can. For example, a freeze on salary increases, restrictions on electricity use in the offices and on trips abroad.
In fact, 95% of staff in Intel Costa Rica is Tico(Costa Rican people) and it makes up 0.3% of the nation's workforce. This number may not seem very large, but when it comes to the quality of this workforce, it is very significant since most of them are either professors or skilled technicians. Responsible for about 20% of the nation's total export, Intel is now doing its best to survive.