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Costa Rica PESTLE Analysis

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PESTLE analysis is key for any business looking to enter a new market or even improving business in the market they are currently in. PESTLE is a strategic analysis tool to understand the rise or fall of the market and whether to advance or retreat in the current market. PESTLE is also known as PEST, both of these acronyms have four common features: political, economic, social and technological. PESTLE contains these four factors but also tacks on legal and environmental factors which are both extremely important considerations. The country I have chosen to do my PESTLE analysis on is Costa Rica. Costa Rica is located in Central America bordered by Nicaragua and Panama. Costa Rica has consistently been among the top ranked Latin-American countries in the human development index, ranking 62nd out of the entire world, further into the report we will break down each PESTLE factor individually and compare it with Costa Rica.

Political

The political area has a huge influence upon the regulation of a business and the spending power of consumers and other businesses. Costa Rica is a constitutional republic; it is the only Latin-American country to have been a democracy since 1950 or earlier. However, when looking at the government's spending, we can see that in 2016 the revenue was CRC 4441.37 billion while total expenditure was CRC 6048.76 billion. With some simple math we can see that this puts the Costa Rican government net lending/ borrowing at negative CRC 1607.39 billion. These figures indicate that not enough financial resources were made available by the government to boost economic growth. The government emphasizes development of democracy and respect for human rights. Costa Rica currently does not have an army therefore they are free of military infringement. There are many laws that protect the rights of consumers and producers in Costa Rica, a few examples include laws that protect formation of contracts, copyrights, trademarks, encrypted program-carrying satellite signals, industrial designs, patents, geographical indication, trade regulations and tariffs. Many imports are taxed very highly, an example of this is vehicles. Older vehicles can be taxed up to 79% of the vehicles price, and on top of that it’s not the purchase price that gets taxed it is the value of the vehicle in Costa Rica which makes it even more expensive to bring a vehicle into Costa Rica. This tax on vehicles can greatly impact business expenditures that involve transportation of goods or rely heavily moving around the country. Minimum wage in Costa Rica ranges from 107,883 Costa Rican colons a month for domestic employees to 397,665 colons for university graduates, having a minimum wage that isn’t overly high is great for foreign investors due to the fact that it means cheap labor. Overall, security is a bit of concern in Costa Rica, while the vast majority of visitors do not become victims to crime all individuals are at potential risk to crime. While majority acts of crime are opportunist acts of theft, there is also theft of travel documents. Both of these should be a concern to investors in the country due to high chance of theft extra security measures must be made in order to keep one's business safe, while theft of documents can cause complications while being in the country.

Economical

Economic factors affect the purchasing power of potential customers and the firm's cost of capital. Costa Rica's economy is expected to grow a CAGR of 3.96% from its 2015 level of CRC 25945.97 billion and reach CRC 34053.90 billion by 2022. However, Costa Rica's unemployment rate was 8.244% of the total labor force which is marginally higher than Canada’s at 6.3 percent. While being marginally higher than Canada’s unemployment Costa Rica's unemployment rate is expected to decrease at a CAGR of 2.70% in order to reach 7.634% by 2022. Costa Rica’s real GDP was around CRC 27069.12 billion in 2016 whereas the nominal GDP was CRC 31287.38 billion. This means that the GDP deflator was 115.583, Per capita GDP in USD 11834.84 where purchasing power USD 16435.83. The current total account balance for Costa Rica was expected to be negative 2 billion USD and is expected to further decline CAGR of 5.46% and reach USD 3.618 by 2022. The fact that the total account balance is decreasing indicates that Costa Rica is a borrower from the rest of the world. Currently Costa Ricans are shopping more often but spending less this could be due to more disposable income paired with a rising educated population. The number of consumers seems to be around 5 million which is a great market size. The current currency for Costa Rica is colons which is steadily rising and expected to continue to rise one USD currently equals 608 colons, even though the currency is rising it is still considered the most stable currency in all of Central America, however all one must take all these factors into consideration due to the fact that rising currency could mean rising costs in one industry but could also mean lower costs in another. Costa Rica also has a huge tourism industry which means many investment opportunities, a major way to invest is in real estate such as property, farms, hotels, bars etc. One of the main reasons for the popularity of real estate in Costa Rica is the extremely low property tax, which is only 0.25% of the registered value of the property. It is also possible to invest in the Costa Rican stock market, interest rates for the country hover around five percent. Costa Rica's lack of mineral resources makes the country heavily reliant of imports. As we can see in their trade balance, they have recorded a trade deficit of 524.60 USD million in January of 2019. Balance of trade in Costa Rica averaged - 278.30 USD million from 1995 until 2019, reaching an all-time high of 139.60 USD million in April of 1999 and a record low of - 661.40 USD million in October of 2012. However, all of this being considered Costa Rica’s economic freedom score is 67.3 making the economy the 49th freest in the 2011 index.

Social

Social factors of society heavily influence consumers and spending habits which is why it is so important to understand them. To start things off we want to look at Costa Rica’s demographic, the current population in 2019 sits around 5 million which is up from the 4.58 million this means that Costa Rica currently ranks at the 120th most populous country in the world, this does not take into consideration the 2.2 million visitors the country receives per year from their huge tourism industry. The population of Costa Rica is around one percent every year which is right in line with other countries, and is expected to reach 5.28 million by 2022. Costa Rica has a population density of 84 people per square kilometer, the biggest and capital city is San Jose which has a population of 300,000 and has a higher than average population density. According to a 2011 census the composition of people were 66% White/Castizo, 14% Mestizo, 9% immigrants, 7% Mulatto, 2.5% Amerindian, 1% Black, 0.2% Asian and 0.9% other, the average Costa Rican in the central valley is 68% European, 29% Amerindian and 3% African. There is a small amount of the population that is indigenous the number is around 100,000 indigenous people that live in reserves, most of these reserves are located in the mountains. The most common European ancestry is Spanish which is why the culture is heavily influenced by the culture from Spain. Another very important factor is that about 15 percent of the population are Nicaraguans some of whom are in the country for seasonal work. Costa Rica is home to many refugees that have fled from nearby Latin American countries over the last forty years. As with population religion is also a huge part of the social factor in Costa Rica, approximately 76% of Costa Ricans identify as Catholic, although not all are practicing. The remaining 24% are Evangelical Christians (13.7%), Jehovah's Witnesses (1.7%), Protestant (0.7%), other (4.8%), or have no religion (3.2%). Religion is heavily present in everyday life as many capital cities are named after saints and many major holidays revolve around Catholicism. Local Culture in Costa Rica is heavily influenced by many factors such as family and traditions, most families live under one household Grandparents, Parents, and kids; while traditions are important because most believe in a certain way of doing things such as maintaining one's household. One thing that many might overlook is the importance of soccer in Costa Rican culture every town has a soccer field and Costa Ricans are fanatics about their favorite soccer team, this is important because it is a great way to build rapport with clients and consumers in order to engage in a strong relationship. Costa Rica also has made major progress in social systems and benefits but more efforts are necessary to reduce poverty and inequality. Education is a huge part of the culture in Costa Rica, since 1869 education has been free and compulsory for all its citizens. Since the country does not have an army, they can afford to put much more of the yearly budget into education. Over the last 3 decades the country has invested close to 30 percent of its budget into primary and secondary education for its citizens, the heavy focus on education has seemed to pay off since the literacy rate for residents 15 and older is 96 percent. Having a highly educated population is extremely important for those considering investing in a foreign country because it means much more access to skilled workers while potentially being cheaper than those in one's home country. The main language spoken in Costa Rica is Spanish but most of the residence can speak English and the higher educated citizens are mostly fluent as the culture places heavy influences on being able to speak English, it is crucial to know the languages spoken in a country before business expenditures. Overall, Costa Rica is rich with culture however one must be well versed with it before any business expenditures.

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Technology

There is little doubt that in today's day and age technological factors are of the utmost importance to business. As we dive into the technological factors of Costa Rica, we can see that since the approval of the Central American Free Trade Agreement in 2007 Costa Rica’s cell phone technology has improved from being (TDMA) the oldest possible cell phone technology to GSM and 3G, where GSM stands for Global System for Mobile. Within the Software Industry of Costa Rica there are over 100 software companies and of those 100 companies over 60% have expertise in exporting goods and services. The country has reduced the government's office presence and increased the services through internet by investing in technological data and high optical communications. Costa Rica’s national plan of science and technology has 7 areas which include health sciences, alternative energies, biotechnologies, natural capital, new materials, digital technologies. One notable feat is that in 2015 Costa Rica became the first country ever to be powered by clean energy for the first 75 days this was achieved through geo-energy and thermal power. Despite large focuses on sustainable energy computer hardware also plays a big role in the technological center. Another notable innovation that was made in Costa Rica was in 2017 when Costa Rican scientists presented the first Central American satellite and although despite being heavily reliant on the agriculture sectors in the past Costa Rica is currently one of the fastest growing nations in the tech center. The research and development sector of Costa Rica was reported at 0.5769 % in 2014 of total GDP spending. Since education is such a big part of Costa Rican culture and of the GDP budget this means that there are more people skilled in technological areas which leads to more advancements and economic growth. After signing the Free Trade Agreement with the United States Costa Rica has improved its limited communication services by introducing new networks, the main telecom carriers in Costa Rica are Ice, Kolbi, Claro, and Movistar. After extensive research I can deduce that Costa Rica has improved exponentially in the technology sector, however it is not quite a key player globally.

Legal Factors

As with any other business, it is important to know and understand local laws and comply with them. The legal factors are closely linked to the political factors in most countries as it is usually the government that creates laws and enforces them. The legal system in Costa Rica compares positively compared to the rest of Central America while at the same time the levels of corruption are among the lowest in Central America. The country ranks 129th in contract enforcement which means it can take 582 days to undertake legal action and enforce it, when compared to the world’s best of 164 days; it doesn’t stack up that well. Costa Rica has discrimination laws that enforce the idea that under law every person is treated the same. The goal of consumer protection laws in Costa Rica is to protect free market transactions and promote free trading, this law does this by reducing or preventing monopolies that would otherwise make it unfair or impossible to enter a market. Another notable law that was introduced in 2013 was the antitrust law which is healthy for an economy such as the national one however when it was first introduced it took up much of the human resources. A strong spot of Costa Rica is many labor laws. These laws include wage laws, standard work weeks, vacation and legal holiday time, notice upon firing, and most interestingly all employees are entitled to a month worth of wages as a Christmas bonus. Costa Rica overall has many excellent legal programs, but lacks in contract enforcement and speed of legal actions and enforcements.

Environmental

Environmental analysis is a critical factor for the country of Costa Rica as much of its economy revolves around it, mainly tourism and protection of the vast environment found in Costa Rica. The environmental factors mainly affect tourism, and agriculture, in modern times it is more tourist focused but before much of the economy heavily relied on agriculture most famously coffee beans. Costa Rica has extremely high levels of biological diversity including 12000 species of plants, 1200 species of butterflies, 800 species of birds, 400 species of reptiles and amphibians and 200 species of mammals. The biological diversity can be attributed to the copious amounts of rainforests and national parks, Costa Rica has many different climates in different parts of the country which intern allows for such biological diversity. One important thing to consider is the 2 seasons in Costa Rica, typically the country has a rainy season and a dry season. The two seasons in Costa Rica are important to consider as the rainy season sees less tourism and the economy is largely based off of tourism so it is affected as such during the season. On average the hottest of the summer months are March and May while the coolest are December and January, nevertheless it depends heavily on the region. Weather isn't the same all over Costa Rica, in fact Costa Rica has 12 climate zones which are mostly impacted by elevation and other geographical factors. Costa Rica’s microclimates are extremely diverse and can vary from a number of climates such as exotic volcanoes and high up cool cloud forests. In the 90s the government implemented plans to protect 18 percent of national parks and another 13 percent of privately owned preserves. An example of protecting a national park is to limit the amount of visitors at a given time. In the 1970’s and 1980’s high amounts of rainforests were burned and chopped down in order to make lots for cattle, however today deforestation rates have dropped considerably. In order to lower deforestation rates Costa Rica passed a ban on the destruction of mature forestry, this ban has seemed to work because studies show that agriculture has been able to thrive and Costa Rica is of the top-ranking countries in combating deforestation. During 2005 Costa Rica joined a special group called of tropical developing countries that proposed a rainforest conservation for emissions. An interesting point is that Costa Rica is one of the most progressive countries on earth in regards to climate change, not just climate change either but they are often praised for being among the best for handling environmental issues. Despite being able to tackle many environmental issues Costa Rica still has problems with fighting poachers and illicit hunting, an example of this is the infamous shark finning that corrodes Costa Rican waters. As a whole Costa Rica is great at tackling and overcoming environmental issues nonetheless there are always some areas that can be improved upon.

Conclusion

After looking over all six factors of PESTLE it is clear that the choice to invest into Costa Rica is not black and white as is the case with most things. Politically, Costa Rica is one of the most stable countries in Central America however it is not without its flaws as crime and theft are an issue. Costa Rica’s economy is currently on the rise and is expected to continue to rise. Overall, Costa Rica is an economically free country. Social and cultural factors play a huge part in Costa Rica. One must be well versed and it may be a lot to take in but once adept can be very rewarding. Costa Rica has multiplied their technology division but still lags behind in certain areas when compared to the rest of the world. When looking at legal factors in Costa Rica it is easy to see the shortcomings when looking at the fact that it can take up to 582 days to enact and enforce legal action. Costa Rica is doing great on environmental issues and is very concerned about environmental conservation, but it needs to improve its catch of poachers. Overall, Costa Rica is a solid country to invest in and many should consider it for their next business venture, but at the same time be wary of the country's shortcomings.

References

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Costa Rica PESTLE Analysis. (2022, December 15). Edubirdie. Retrieved March 2, 2024, from https://edubirdie.com/examples/costa-rica-pestle-analysis/
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Costa Rica PESTLE Analysis [Internet]. Edubirdie. 2022 Dec 15 [cited 2024 Mar 2]. Available from: https://edubirdie.com/examples/costa-rica-pestle-analysis/
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