Free Trade Zone Regime (FTZR)

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Government investment incentive program providing tax exemptions, customs benefits, and infrastructure support to attract foreign direct investment in manufacturing, services, and export-oriented industries.
What are the main aims and objectives?

Costa Rica's Free Trade Zone Regime (FTZR) aims to diversify the national economy away from dependence on traditional agricultural exports (coffee, bananas, sugar) toward higher-value manufacturing and service sectors. Established through Law 7210 in 1990, the regime targets specific goals: attracting multinational corporations engaged in high-technology sectors including microelectronics, medical devices, and software development; generating employment particularly in skilled, high-wage positions; increasing exports and foreign exchange earnings; creating backward linkages between foreign firms and local small and medium-sized enterprises (SMEs); and reducing regional inequality through geographic distribution of investment beyond the capital region. The regime addresses critical barriers facing Costa Rica during the 1980s economic crisis, when the country faced recession, commodity price volatility, and unsustainable import-substitution economic model. By offering competitive tax treatment and streamlined procedures relative to standard Costa Rican business operations, the FTZR seeks to position Costa Rica as attractive alternative to competitors seeking regional Latin American production or service delivery hubs. The regime represents deliberate industrial policy targeting non-commodity sectors as pathway to sustainable long-term growth and improved living standards.

How does the program work?

The FTZR operates through a coordinated system of tax exemptions, customs privileges, and operational streamlining managed by the Foreign Trade Promoter (PROCOMER). Companies operating within designated industrial parks receive comprehensive benefits structured across multiple dimensions. 

Tax and Customs Benefits: Eligible companies achieve 100% corporate income tax exemption for 8-12 years (depending on location), followed by 50% exemption for subsequent 4-6 years. Companies receive full exemption from import duties on raw materials, components, machinery, equipment, and production inputs. Value-added tax (VAT) exemptions apply to purchases of local goods and services, while export duties are completely eliminated. Real estate transfer taxes, municipal patents, and license fees are exempted for 8-12 years.​ 

Operational Framework: To participate, companies must invest between USD 100,000 and USD 2.5 billion in fixed assets (requirements vary by sector and location) and maintain employment commitments typically requiring 10-20% workforce expansion within two years. Companies register with tax authorities and obtain environmental permits when applicable. They maintain separate accounting systems documenting goods entry, duration, and departure, using government customs declarations and seals.​ 

Permitted Activities: The regime encompasses manufacturing, trading, services (software development, consulting, call centers, business process outsourcing), research and development, and tourism operations. Activities explicitly excluded include mineral extraction, hydrocarbon exploration, electrical generation, and weapons production.​ 

Physical Infrastructure: Companies establish operations within privately-owned industrial parks strategically located throughout the country, with historical concentration within 20 miles of the main international airport. Parks provide specialized facilities including office spaces, manufacturing workshops, and service centers with integrated administrative support.​ 

Local Supplier Integration: A significant feature involves creating linkages between multinational corporations and local SMEs. By 2018, FTZ companies' local purchases reached USD 2.203 billion, representing 47% of total procurement. These linkages have proven remarkably productive: approximately 70% of local suppliers report positive sales impact, 58% report significant quality improvements, and 36% of local supplier managers previously worked for multinationals, facilitating knowledge transfer.​

What is the overall cost?

The FTZR received an initial infrastructure investment exceeding USD 27.4 million (approximately 100 million colones) at its establishment. However, specific ongoing annual government budgetary allocations specifically designated for FTZR administration are not publicly itemized in accessible sources.

How was it implemented?

Initial Legislative Foundation: Costa Rica's economic crisis of the 1980s, characterized by severe recession, external debt default, and unsustainable import-substitution model, prompted government economic restructuring. The foundational law (Law 6695) was enacted December 10, 1981, establishing initial "Export Processing Zones" framework. However, the original 1981 law proved highly restrictive, limiting zones to manufacturing exports with explicit exclusion of service sector activities. 

Transformative Legislation (1990): The critical turning point occurred with enactment of Law 7210 "Law of the Free Trade Zone Regime" on October 1990. This legislation fundamentally modernized the framework by incorporating services, removing export destination restrictions, expanding eligible companies, and establishing strategic planning for multinational corporation attraction. Law 7210 represented shift from temporary crisis management toward permanent development strategy centered on non-commodity economic diversification. 

Institutional Development: PROCOMER, established as lead implementing agency, coordinates investment attraction, regime administration, and policy development. The quasi-public Coalition for Development Incentives (CINDE) emerged as private-sector-government partnership body supporting investment promotion and private-sector engagement. 

Operational Timeline: 

1981: Law 6695 establishes initial export processing zone framework 

1990: Law 7210 enacted, dramatically expanding regime scope 

1998 (Law 7830): First significant reform, strengthening oversight mechanisms 

2002 (Law 8262): Reform facilitating local supplier linkages and WTO compliance 

2010 (Law 8794): Major reform modifying benefits to comply with WTO export subsidy restrictions 

2019 (Law 9689): Recent reform enabling service companies to provide domestic and international services Present: 68 designated FTZ parks operating with 600+ companies and 265,000+ direct and indirect jobs

What impact has been measured?

A full cost-benefit analysis of the FTZR has been conducted by IDB. Economic Scale and Contribution: The FTZR has generated substantial macroeconomic impact. FTZ firms' GDP contribution expanded from 0.5% in early 1990s to 8% by 2003, reaching 15% by 2024. In absolute terms, FTZ companies generated USD 12.276 billion in production value in 2023, representing 14% of GDP. The regime has cumulatively attracted hundreds of billions in foreign direct investment since 1990.​ 

Foreign Direct Investment: Nearly half of all FDI inflows during the 1990s entered under FTZR incentives. By 2024, FTZ regimes received 64% of total FDI inflows, amounting to USD 2.217 billion that year (representing 24% increase from USD 1.685 billion in 2023).​ 

Export Transformation: FTZ companies' export contribution rose from 6.5% of total exports in 1990 to 53.7% by 2003, and 65% by 2024. The export composition shifted qualitatively toward higher-value products: medical devices comprise 44% of total goods exports (establishing Costa Rica as Latin America's second-largest medical device exporter after Mexico), with significant semiconductor and electronics production.​ 

Employment and Wages: FTZ employment expanded from 7,000 workers in 1990 to 35,000 by 2002 (16% of industrial employment), reaching 265,000 direct and indirect jobs by 2024. Critically, jobs in FTZ companies pay approximately 1.8 times average economy-wide wages, indicating quality employment generation. Women comprise approximately 45% of direct FTZ employment by 2024.​ 

Local Integration: Between 2010-2019, more than 1 trillion colones in annual tax payments flowed from program-supported enterprises. Program-supported enterprises have created demonstrated backward linkages: 143 local firms produce inputs/services for multinationals, with 99.3% comprising micro, small, and medium enterprises. Approximately 70.7% report positive sales impact, and 58% report significant product quality improvements from MNC relationships.​ 

Technology Spillovers: Evidence indicates knowledge transfer through multiple channels: 27.5% of local suppliers received training from MNCs, 36.2% of managers and 27.6% of engineers in local supplier firms previously worked for multinationals, and econometric analysis demonstrates backward linkages produce positive productivity impact on local firms.

What lessons can be learned?
  • Enclave Risk and Limited Autonomous Development: Despite documented backward linkages, FTZ operations remain structurally partial enclaves with 43-53% of procurement involving imported inputs and profit repatriation, limiting organic development of autonomous domestic productive capacity. The regime has partially mitigated enclave risk through linkage programs, but fundamentally remains oriented toward export-oriented multinationals rather than domestic entrepreneurship.
  • Fiscal Sustainability Concerns: While cost-benefit analysis demonstrates net economic benefits (USD 1.80 per dollar exempted), absolute magnitude of foregone tax revenues affects Costa Rica's fiscal position at time of significant debt burden. Emerging fiscal pressures have prompted government debates about potential FTZR taxation expansion, suggesting fiscal sustainability may ultimately constrain regime expansion despite micro-level profitability.
  • Employment Concentration and Inequality: While FTZ employment averages 1.8 times economy-wide wages, this masks significant inequality—high-skill positions offer premium compensation while assembly-line positions offer modest premiums. This concentration may contribute to rising income inequality rather than inclusive development, with women likely concentrated in lower-skill positions despite comprising 45% of employment.
  • Sectoral Concentration and Export Vulnerability: Costa Rica's extreme export concentration (65% from FTZ-produced goods by 2024, with 44% medical devices) creates vulnerability to multinational relocation and sector-specific global demand fluctuations. The regime's success in attracting specific sectors paradoxically creates macroeconomic fragility compared to more diversified export bases.
  • Environmental and Social Governance Gaps: While individual FTZ companies achieve notable environmental certifications and corporate responsibility initiatives, the regime's structure provides limited mechanisms for ensuring comprehensive environmental compliance and social accountability beyond baseline legal requirements. Pollution externalities and community impacts may exceed individual corporate initiatives.
  • Persistent Geographic Concentration Despite Regional Development Objectives: Despite explicit targeting of peripheral provinces, FTZ benefits concentrate in Greater Metropolitan Area, with recent geographic expansion primarily to Guanacaste and established urban centers. Early attempts to concentrate zones in peripheral regions (Puntarenas, Limón) yielded disappointing results because peripheral regions lacked complementary infrastructure and institutional capacity. This indicates that financing availability alone cannot overcome structural regional disadvantages without supporting infrastructure and capacity development.
  • Declining Competitive Advantage: As other countries develop competing FTZ regimes with similar incentives, Costa Rica's competitive advantage derives partly from historically unique combination of political stability, environmental commitment, and education levels. Competitors continuously improve, raising questions regarding required competitive renewal investments and long-term regime viability.

CURATED BY

Tom Hancock

Research Associate
Global Entrepreneurship Network
United Kingdom