Policy competition for foreign direct investment in the Caribbean Basin: Costa Rica, the Dominican Republic and Jamaica

Abstract The globalization process based on more intense trade competition among countries coupled with a process of transnationalisation, in which TNCs adapt by establishing international systems of integrated production, produces the result that countries also compete more for foreign direct investment. Countries realize that the attraction of a substantial element of a TNCs international system of international production —specially one that is export intensive— can represent a very meaningful way for a country to adapt to the globalization process. This is particularly the case for small countries lacking a indigenous industrialization process. Countries compete for FDI through (1) incentives, that is, the provision of direct or indirect subsidies, tax holidays and other financial incentives, (2) rules, that is, the strengthening of a market economy with an adequate legal system, labour and environmental standards, intellectual property rights and regional integration agreements, and (3) factors, that is, the development of production factors and infrastructure needed for an efficient economic performance. Depending on whether countries fall prey or not to 'bidding wars', policy competition for FDI can result in either positive- or negative-sum games. An examination of this situation in the Caribbean Basin, based on the experiences of important FDI recipients like Costa Rica, Dominican republic and Jamaica, suggests that policy competition for FDI has intensified and both the positive and negative aspects have become evident. These case studies all use export processing zones as their principal incentives and the main linkage between these small Caribbean countries and their principal export market is found in the assembly of apparel in EPZs. An analysis of their experiences, based on questionnaires administered to some of the most important firms operating in these industries coupled with an evaluation of national benefits, suggests that a kind of bidding war exists there and that just keeping up with what other countries offer as incentives to TNCs often backfires and that unfocused incentives often produce unpredictable results. Based on these experiences, this studies suggests that integral, active policies focused on wider national goals are required to better target relevant TNCs in a more functional way. The success of Costa Rica in attracting a huge investment by the United States semiconductor TNC, Intel, based more on the provision of a skilled and capable work force rather than sheer incentives, would appear to be a practical example to follow in this regard.