Executive Summary

Conclusion | Strengths That Will Allow For Greater ICT Development | Weakness That Need to be Addressed to Promote Greater ICT Development

COSTA RICA’S NETWORKED READINESS

Analysis Provided by:

Olman Hernandez

Brad Bilotta

Carl Medlicott

Seth Pomeroy

For

Dr. Olayele Adelakun Ph.D

IS 540

March 20, 2003

COSTA RICA’S NETWORKED READINESS

The Central American favorite Costa Rica has attained significant results in its efforts to enhance the deployment, access, and use of information and communication technologies (ICTs). This effort has been led by an activist central government who recognizes the country’s long-term growth potential can only be achieved by the widespread adoption of information rich technologies, the fostering of high-tech employment, and incenting certain high-tech foreign producers. Striving to realize these goals has already paid-off in the form of broader ICT preparedness, higher living standards, and a strong reputation as a “go-to” IT country of the region. The resident works of such major companies as Intel, Microsoft, Oracle, Motorola, and Cisco Systems indicate that an adequate mix of infrastructure, opportune labor, political stability, banking facilities, and economic incentives are apparent. By analyzing these factors according to the Framework developed in Harvard Business School’s Readiness for the Networked World we have concluded that Costa Rica is currently at a Stage Three level of ICT readiness. Such readiness is concluded upon after considering advancement in six distinct categories. These include Network Access, Networked Learning, Networked Society, Networked Economy, Network Policy, and Offshore Opportunities. For each of these supporting sections of analysis we have also included recommendations as to how the nation might further prepare itself, and thus recognize the highest level of global ICT readiness.

NETWORK ACCESS

According to the Framework Costa Rica’s Network Access would be in Stage Three. The advantages the country maintains in having a single state owned and controlled telecommunications provider –Grupo ICE— is in its ability to offer a broad range of ICT services at an affordable price to the majority of the population. However, on its own this monopoly has been unable to expand Network Access service and support to a point of Stage Four Readiness.

ICE provides a sizeable component of the Costa Rican community with reliable access to its Information Infrastructure. In 2002, teledensity was considered to be at 27 fixed telephone lines per 100 inhabitants (see Appendix A-1). In the past 6 years, wireless services have experienced an increase of 750% in teledensity reaching a level of 15/100 (GrupoICE). Three years ago services from the country’s cable TV providers (three were in existence at the time) were utilized by 12.5% of all households (Monge & Cespedes 2002).

Given the teledensity of Costa Rica, dial-up service is one of the most sought after means of allowing for Internet Availability. Currently RACSA (the official Internet and domain authority) has 150,000 available connection ports for Dial-up services, utilizing only 60% of this capacity at peak times. RACSA offers a variety of other ways to reach the Internet including access by cable modem, DSL, wireless, and dedicated lines. A recent poll conducted by CID-Gallup indicates that about 800 thousand Costa Ricans access the Internet from home, work, or in Internet cafes, although capacity exists to provide even greater access; current bandwidth supports access by as much as half of the nation’s 3.8 million citizens. According to this same study, 53% of the population considers prices for Internet service as low and acceptable. Thus, Internet Affordability has been attained by a slight majority of the population (RACSA).

The backbone of the country’s telecommunications network is fiber optic based, with wireless access to remote areas. Digital switches that provide voice, data, and video service links via satellite, microwave, and fiber optic lines further support this infrastructure. According to RACSA, 98% of international traffic is transmitted by two submarine fiber optic networks, Maya and Arcos (RACSA, ICE). This strategy for coverage and connectedness has enhanced Costa Rica’s overall Network Speed and Quality.

The Costa Rican association of software developers estimates that the Software industry numbers over 150 companies providing local applications in multiple market areas. An estimated 85% of these companies export their products to Europe and America (Caprosoft). Furthermore, a variety of software solutions from global producers like Microsoft, IBM, and others can be found at local retailers. The local computer Hardware market is floated by the so-called “Clone” computers (computers assembled in Costa Rica), but brand name laptops and desktops are also sold and serviced.

Service and support is one of the most problematic areas for ICE. As of October 2001, there was a list of over 130 thousand pending service requests, most of them pending for over six months time. For wireless telephone services, 296 thousand users have to wait an agonizing period of well over 6 months to attain service (ICE).

Recommendations for the development of Costa Rica’s Network Access It is our recommendation that a restructuring of Grupo ICE be completed allowing it to establish joint ventures with other international telecom providers. This will require legislative initiatives that change the current policies governing foreign participation in building telecommunications infrastructure. Additional initiatives to fund greater expansion of fixed and wireless telephone capacity and bolster customer service should be considered. Greater access by the population to Dial-up or DSL services should increase Internet usage, creating a wider customer base and lowering cost. The effect would be to bring Network Access to the lower economical sectors, thus diluting the lines between a technologically divided society. Further benefits of this change in policy would include having the populations overall skill and knowledge of ICT devices increase.

NETWORKED LEARNING

Costa Rica is a well-educated country with an estimated literacy rate in 1999 at 95.5% of the population (CIA), with informal secondary education at 83% (International Reports). Informal secondary education includes high schools and employer-sponsored education. Unfortunately, Costa Rica’s overall technical school graduates are fairly low, which will prevent the country from becoming a high-tech power. As a result, Costa Rica’s Network Learning would barely be in Stage Three. The government is trying to make education about computers and the Internet use more widespread, but this preparedness is generally realized by the children of the wealthy and urban. This is further complicated by the fact that in poorer regions of the country stand-ins who lack skills in the computer sciences too often are responsible for ICT education. As a remedy, the government is working diligently with private corporations and philanthropists to encourage and educate more citizens about ICT usage. School Access to ICT’s is a way to increase technology awareness of the Costa Rican pupils. Unfortunately, only 5.9% of Costa Rican public schools have Internet access (Monge & Cespedes, xxxix). Costa Rica is attempting to combat the low accessibility rate by creating community access centers where citizens may access the Internet (Monge & Chacon, 8).

The Omar Dengo Foundation has been responsible for creating many of the elementary and high school computer labs and training many of its tutors (Verdisco & Navarro, 98). To date, the Foundation has graduated over 15,000 teachers and administrators from its ranks (98). It is also estimated that this program has benefited more than 2 million students; for an overview of this trend see Appendix B-1 (Monge & Chacon, 46).

Enhancing Education with ICT’s is a way to improve the technological knowledge of the public. In one study, an attempt was made to discern the usage of computers in the Costa Rican educational system (Dobles, 23). It was found that the majority of the labs and the teachers running the labs were not focusing on the actual computer technology, but focused on enhancing the teaching process instead (23). The study found that the lab tutors were effectively using computers to educate and improve the education process while the non-lab teachers were not viewed using the computer as a tool (23). In other words, the study shows that the computer help / tutors are computer literate and use the computer as a tool to help educate the students, but the other non-computer teachers are still on the other side of the technology divide.

Developing the ICT Workforce is a major issue when trying to create a technologically adept country. Costa Rica realizes the importance of training its citizens to become computer literate. Currently there is a program called "Tecnoclub," which provides computer and Internet training to low-income kids and teens that would not normally have access to the Internet or computers (Pratt). Another concept called “Communication Without Borders”, created more than 100 computer centers in libraries, municipalities, post offices, and community centers (Pratt). In opposition to the success of these privately sponsored programs, only 26% of high students obtain their degree in technical areas (Monge & Cespedes, 92). The reader should consult Appendix B-2, which shows a decline in level of high school technical graduates in the period from 1996 to 2000 (92).

Recommendations for the development of Costa Rica’s Networked Learning To get to the next Stage of Networked Learning the country’s educational system will require reform. More teacher education programs will be needed to ensure students are properly educated. The Massachusetts Institute of Technology, along with the Ministry of Education has started a program to train educators to enable more qualified and better prepared computer professionals (Dobles, 24). The government has also taken a stand by passing a Constitutional referendum that mandates 6% of GDP is spend on education (24). Hopefully this will get more computers into the classroom with better Internet connections and networks. One possible way to increase the number of tech savvy citizens is by offering computer scholarships or possibly establishing a closer working relationship with corporations to set educational standards. With continued effort, the educational system should slowly improve and achieve its goals, but further programs may be necessary.

NETWORKED SOCIETY

Judging by the Framework Costa Rica currently appears to have achieved a Stage Three level of “Networked Society.” Despite its interference with private telecom development the central government’s role in analyzing, directing, and fostering the spread of ICT use throughout Costa Rica’s various societal enclaves appears to have been a success. While more widespread adoption of ICT technologies has not occurred due to the nation’s overall rural displacement and modest economic means, the research and recommendations of the Costa Rican High-Tech Advisory Committee (CAATEC) has addressed change vis-à-vie a few main societal drivers. From their recommendations and a change to the policies that hinder the access of foreign expertise to help build telecommunications infrastructure, Costa Rica should recognize many additional benefits of a Networked Society.

People and Organizations Online are on the rise in Costa Rica, but access has not approached levels near those of a first-tier ICT society (See Appendix C-1). As originally reported in CAATEC’s year 2000 survey “…only 3.4% of [households] has this service…” (Monge & Cespedes xli). In 2002, on-line households rose to 5.6% (xli), with access inordinately skewed to youth (215). This development has not occurred by mistake as the Costa Rican government has been very proactive in the development of IT curriculum in its primary and secondary school systems “Costa Rica [has] established comprehensive programs for general education on and using information technology” (Press 8). A March 2003 poll indicates that Internet penetration may have reached 22% of households (RACSA). This suggests that the efforts of ICT education have begun to work their way into the broader societal fabric. Domain registration in Costa Rica lags other ICT rich societies, but it is not non-existent comprising about a 1% coverage to the total population (NIC). In addition, there are a number of Web-sites that provide for information about Costa Rica, its social life, business presence, and interests that are hosted in the US and use the .com/.net extensions. Examples include Teletica , The Costa Rican Outpost, and The Costa Rican Tourism Board. These sites show that important content including media, commerce, and tourism information, emanate from .com domains. Similar to the limited number of .cr domains traditional Costa Rican media provides a limited number of direct references to the Web-sites of domestic companies.

From the Costa Rican government’s perspective the lack of Locally Relevant Content is apparent and problematic “…there are not enough Internet Content Providers (ICPs) in Costa Rica…” (Monge & Cespedes xli). The lack of domestic based content providers may have raised the ire of officials for nationalistic reasons as content is available but it often comes from the servers of ICPs in foreign countries. In addition, the use of globally prevalent languages (Spanish and English) may have also inadvertently promoted a delay in the development of local content. As content providers, government agencies in Costa Rica are more visible than their business counterparts: 86% of all government institutions sponsor a Web-site (226), where only 4% of small and medium enterprises host sites (188). The availability of training and telecenters around the country almost creates a secondary usernet group itself “…there are fifty-two telecenters already operating, and 120,000 e-mail users” (224). This effort will most likely promote greater use of the Internet and the authorship of deeper Internet content.

ICTs in Everyday Life is strong and growing in Costa Rica. Here, though an assumed slow approach, the Costa Rican telecommunications authority (ICE) has made progress with developing the number of fixed-line phones throughout the country. The statistics show that “…the number of phones per 100 inhabitants having risen approximately 45% between 1996 and the first weeks of 2002” (27). Telecenters throughout the country fill-in many of the gaps for those who can not afford individual ICT access. This development has been achieved by the willful decision of the Costa Rican government in creating the Communications Without Borders Program. This program is described as “…a national project to promote access to and use of Information and Communications Technologies (ICTs) by Costa Rican citizens…” (223). Despite this achievement, a bureaucratic state model deters some high-tech foreign interests who might otherwise find Costa Rica an ideal offshore base “Companies frequently cite as a negative factor the difficulties of working with the slow and legalistic government bureaucracy and regulatory agencies…” (USCSE Trends and Outlooks 2, 3).

The Costa Rican business community is highly defined by what is known as the Micro and Small Medium Enterprises (MSME). The employers of less than 100 account for 95% of the private businesses in the country (Monge & Cespedes 178). Obviously, following their development is particularly important in determining the overall level of ICTs in the Workplace. Here, the record points to a low overall penetration of computer use and Internet access/content. It is reported that 59.7% of MSME businesses do not employ the use of computers in their work process (186). Furthermore, access to the Internet and email is counted quite low with 70.4% of the same group claiming no access or use (187). Finally, only 4.7% claim to have made available a company Web-site (188).

Recommendations for the development of Costa Rica’s Networked Society In Costa Rica, the central government seemingly outweighs or overwhelms other social agents in respect to influencing ICT development and preparedness. This is due to the fact that they have a stranglehold on telecommunications services, and as a result of their very activist role in managing the country’s educational networks. Therefore, promoting ICT Readiness through the societal network falls squarely on their shoulders. To date, it appears that contributing to a long-term trend towards ICT readiness and use can not be achieved by the government alone. The country and its legislature must consider helping to change course from the one currently taken “The legislative Assembly considered legal amendments to permit the restructuring of the state-owned telephone and electricity monopoly (ICE), which if enacted, would have significantly expanded possibilities for establishing joint ventures in the telecommunications and energy sectors. The Assembly passed the legislation in the first of two required votes, but the bill was struck down in April [2000] by the Supreme Court…” (USCSE Trends and Outlooks 3). Quite simply, the development of ICT and its spread throughout society must be considered with the help of other potentially more efficient external service providers. Costa Rica’s ability to move to a Stage Four level of Networked Society may depend upon such change.

NETWORKED ECONOMY

The characteristics of the Costa Rican economy are marked by relatively low unemployment, but also low average annual incomes; current statistics show unemployment at 5.2% of the population with 2002 average income at $3,960 (see CIA and BBC News respectively). This provides a backdrop to the analysis of Costa Rica’s Networked Economy whose Readiness is currently Stage Three. ICT Employment Opportunities and E-Government are more solidly within Stage Three but B2C & B2B Electronic Commerce are bordering Stages Two and Three.

ICT Employment Opportunities are drawing offshore outsourcing jobs to Costa Rica. Appendix D-1 shows an adequate number of workers available in all trade skills to meet the current demands of employers and also the future demands (Monge & Cespedes 119). Simultaneously, desired education levels are not being fully met for employers, as seen in Appendix D-2, D-3, and D-4. These deficits do not seem dramatic enough to cause any issues with attracting overseas business (118). Adjustments to the level of technically educated Costa Rican’s will have to be made in order for the long-term stability of outsourcing to be assured (119).

B2C Electronic Commerce is still in its infancy stages. Only about 5% of MSMEs have a Web-site, of which only 9.2% actively use the Web-site to collect payments (188). Most businesses do not see the Internet as an advantage because the majority of Costa Rican’s only pay by cash (94%) or check (48.5%), as seen in Appendix D-5 (195). Though, it is worth mentioning that 73.6% of the consumers that use the Internet do so to comparison shop (187). Overall, consumer E-commerce is not very prevalent due to certain cultural norms and more wide-spread Internet adoption in the home.

B2B Electronic Commerce is also in the infancy stage. 59% of MSMEs do not have computers and about half of those do not consider them necessary to operate their business (186). This is a barrier for Costa Rica because the more businesses that do not embrace technology the harder it will be to provide online services to those that want it. Only 7.9% of MSMEs use the Internet to sell their products to larger businesses and 12.6% use the Internet to sell their products to like MSMEs (187). While the government has passed bills that allow e-commerce transactions to take place with protection for both the buyer and seller, businesses are not taking advantage of the efficiencies in B2B transactions as quickly as other countries. Appendix D-6 points out the growth of e-commerce in the U.S. over the last 4 years, which shows the obvious efficiencies gained through B2B because of the tremendous growth rate. Appendix D-7 shows the relationship between the size of the business and the LER (Level of e-Readiness). Larger businesses are gaining efficiencies by incorporating these technologies into their every-day business practices. As the government increases the amount of B2G (Business-to-Government) Internet transactions, businesses will begin to gain efficiencies.

E-Government is considered a driving factor in a countries Readiness for the Networked World. Appendix D-8 shows the different Costa Rican governmental institutions with outstanding web projects, and the dedication of some areas of government to provide streamlined procedures and access. Appendix D-9 indicates that 62% of government institutions provide for more advanced forms of on-line service, including interactive and on-line payment. The remainder fall within a lower level of service that is characterized by static Web pages (159). Overall, 100% of Costa Rican governmental organizations have Web-sites (157).

Recommendations for the development of Costa Rica’s Networked Economy Costa Rica is in a precarious situation right now. On one hand, Internet access is slow to be adopted in the home, while on the other hand, Costa Rican businesses do not want to invest in on-line stores because of the relatively low participation rate. Overall, the population must embrace the Internet at home in order to make e-commerce transactions popular and common. In an effort to spur consumer e-commerce businesses could provide a cost savings to those that order on-line. A means to promote e-government is for more agencies to offer interactive and transactional based Web-sites. This will allow a greater percentage of the population to take advantage of the government procurement, transaction, and distribution systems that are used everyday by businesses and citizens through traditional in-person and paper methods.

NETWORK POLICY

Although Costa Rica places restrictions on foreign investments in the state owned monopolies of insurance, telecommunications, electricity and petroleum refining, there are few significant barriers for other sectors. Other business friendly policies include few restrictions on the repatriation of profits to foreign countries with the exception of withholding tax deductions (this may also change in the near-term). Despite the adverse effect of Costa Rica’s telecommunications monopoly the country’s free trade policies, low tariffs, and many incentives for trade and foreign investment put them in a Stage Three level of Network Policy.

Telecommunications Regulation in Costa Rica is very strict. However, the government actively tries to keep the telecommunication infrastructure modernized. They have imported millions of dollars worth of telecommunication equipment from the US (see Appendix E-1). In 2000, after a bill was passed to privatize state owned power and telecommunication services, a four-day protest with over 100,000 people ensued (Anti-Imperialist News Service). The bill was later ruled unconstitutional. The Constitution currently makes it illegal to sell any state-owned enterprise, but it does allow privatization provided there is an amendment to the Constitution (OTT). With the problems Costa Rica has encountered in the past and the problems they know will occur if another privatization law is proposed, privatization in the near-term is doubtful. Although initiatives for telecommunications privatization did not pass, the government has progressed in measures to further digitize the country. During March of 2001, in an attempt to further enhance the countries telecommunication system, the Costa Rican President set forth a five point “Digital Agenda.” The plan set forth to make Internet access faster, cheaper, and readily accessible to all Costa Ricans (Pratt).

ICT Trade Policy is a serious issue for the Costa Rican Government. Many foreign investment incentives have been created to facilitate trade. Free Export Zones have been created within Costa Rica. These zones offer tax-free privileges to industrial and agricultural business as well as certain processing and service activities. A national tax holiday allows savings on income, withholding, consumption and other duties (Lowtax.Net-1).

Costa Rica has signed all the major international agreements regarding intellectual property and in 2000 legislation was passed criminalizing commercial scale trademark and copyright violations. Even with these laws and agreements, it is estimated that these violations cost US firms $20.1 million in 2000. Costa Rica is currently on the Special 301 Watch List for countries that are severe violators of intellectual property agreements (IIPA, 90). While Costa Rica’s copyright laws are fairly adequate, they are not uniformly enforced, and their Patent laws are deficient. Costa Rica’s estimated business software piracy in 2001 was 69%, this equates to approximately 7 in 10 business related software programs being illegally installed (80). It is clear that the policies and laws that were initiated are not solving the problem, so something further will need to be done.

Recommendations for the development of Costa Rica’s Network Policy Costa Rica has two identities in the Network Policy Framework. On one hand, they have created laws that promote investment by foreign companies, yet the government has not been able to shrink the incidents of intellectual theft. To make matters worse, they still have a state run telecommunication system that can’t compete with the offering of private organizations. As an antidote, they should focus on getting control of the incidents of intellectual property theft and allow joint ventures with the telecomm authority ICE.

OFFSHORE OPPORTUNITIES

Some people say that Costa Rica is “The Switzerland of the Americas.” One reason for this is the statutory requirement of non-disclosure forced on all banking institutions. This means banking information on any client cannot be shared with any government agency, including the tax department (Global Money). Included in this statutory law is secrecy of the principal that allows confidentiality when setting-up a corporation (Global Money). In addition to anonymity, it is relatively easy to set-up operations in Costa Rica; generally a legal entity can be established in less than two months and cost as little as $5,000. Further incentives come in the form of “Free Trade Zone”, where there are very favorable tax modifications granted. Some additional benefits include exemption from import tariffs, withholding tax, and even income tax.

Costa Rica is an active member of the international community and, in 1993, proclaimed its permanent neutrality (Wikipedia). With its record on the human rights, the environment, and it’s peaceful settlement of disputes, if offers a stable political environment and an ideal place to establish operations.

Due to some of the aforementioned advantages offshore opportunities are no longer a secret. In 1998, there were 219 offshore companies employing approximately 27,000 that generated exports of just under US$2 billion (Lowtax.Net-3). Companies like Intel, Procter & Gamble, Abbott Labs, Bristol Myers, Chiquita Brands, Texaco, and dozens of others have made huge investments in Costa Rica. It is estimated that non-Costa Rican companies invested over US$600 million in Costa Rica just in the year 2000 (Consultores Britanicos). In the case of Intel, the main factors for establishing operations in Costa Rica was the government's liberalization of trade and investment, political stability, geographical proximity to the United States, and a good education system relative to other Latin American countries (Info Brief). Intel began manufacturing here in early 1998 producing Pentium 4 and Pentium Xeon chips and chip-sets (Intel). In 2001 the big moves included Procter & Gamble who moved its shared-services center for the Americas to Costa Rica as well as Western Union’s decision to establish its financial center there (International Reports).

CONCLUSION

Based upon the findings we have developed within the Framework we conclude with a list of Costa Rica’s strengths and weaknesses as they relate to ICT preparedness. Hence, we are summarizing what the country needs to build on –and more fully address— in order to become part of the world’s networked economy. Becoming a full-fledged member of this networked economy will allow Costa Rica to reap the benefits of higher standards of living, a more free-thinking society, and greater efficiencies “Getting ready for the Networked World creates new opportunities for firms and individuals in the developing world, eliminates barriers that have traditionally stifled flows of information and goods to and from developing nations, and promotes efficiency in a host of activities” (Information Technologies Group 6).

Strengths That Will Allow For Greater ICT Development

· Comparatively Low Wages – As evidenced by annual average wages of $3,960 (BBC) Costa Rica can far out-complete many other countries in wage competitiveness. This should allow the country to continue to draw offshore investment to engage this source of low cost, yet skilled labor.

· Comparative Online Access – Compared to many nations of the region Costa Rica has a higher level of societal Internet access (see Appendix C-1), telecomm infrastructure, and on-line content. This on-line capability will help to develop the country’s IT economy.

· Political Stability – Costa Rica is known for its political stability and long-standing form of democratic government. This can not be taken for granted in the world’s current state of terrorist threat.

· Low Barriers to Entry – The low costs and reasonably easy means of forming a business Costa Rica are important factors for offshore ICT opportunities.

· Certain Trade/Tax Incentives – Costa Rica provides tax, trade, and development assistance that has helped promote the setup of Intel, Microsoft, and Motorola’s operations.

· Activist Educational System – Although certain levels of competency are accepted Costa Rica has found that promoting a general awareness of the Internet, computers, and software development in its primary and secondary school systems is beneficial to long-term labor readiness.

· Strong Community of International Businesses Located – The march of international high-tech companies to the country has facilitated an understanding of the needs of those giants and a better means of providing the infrastructure required to support their operations.

Weakness That Need to be Addressed to Promote Greater ICT Development

· Educational Gaps or Lack of High Tech Candidates – Costa Rica needs to more fully engage its secondary students to pursue interest in technical schools. The current decline of enrollment at these schools does not portend a strong future for advanced high-tech employment.

· Lack of Telecomm Coordination or Joint Ventures – Costa Rica must provide forbearance of joint ventures with its telecomm monopoly Grupo ICE. Without engaging in the politically impalpable process of telecomm privatization the country needs to engage outside expertise to expand and enhance its telecomm infrastructure. This will allow for a more electronically based economy.

· Lack of Enforcement for IP Agreements (Piracy) – If for no other reason than to appear to be have control over its internal laws Costa Rica should crack down on software piracy. This is especially important in the process of attracting software engineering to the country.

· Lack of Middle Class Buying Power – In order to support a more responsive middle-class that typically buys high-tech, high-touch goods Costa Rica needs to spur economic growth through lower taxes, and savings incentives.

· Lack of Private Sector Initiatives – Although Costa Rica’s central government appears to have done a lot to support changes in the country’s ICT preparedness the question about the private sector’s role must be more fully examined. Here, the government’s will to constantly drive economic development, planning, and direction should be reconsidered if the consequences result in a less activist private sector.