By San José, Costa Rica — Costa Rica is facing a profound economic challenge as the vast majority of its workforce remains trapped in a stagnant domestic sector, completely decoupled from the roaring success of the nation’s free trade zones. A groundbreaking new study reveals that the definitive economic regime, which accounted for a staggering 88.4% of Costa Rican employment in 2024, recorded an average productivity growth rate of -0.1% between 2016 and 2021. In stark contrast, the country’s tax-exempt free trade zones registered an impressive 10.9% productivity growth over the same period, underscoring a deep-seated structural dualism.
This critical disparity lies at the heart of a comprehensive research paper titled “Productivity and innovation for a more inclusive and sustainable productive development: How to overcome productive duality in Costa Rica.” Authored by prominent economists Ricardo Monge-González and Isaac Ovares Sandí, and published by the Academia de Centroamérica, the study combines a rigorous diagnostic of the local economy with international benchmarks to propose a pathway toward cohesive economic progress. The authors argue that Costa Rica’s current approach to business development is highly fragmented and desperately needs a centralized national strategy.
To better understand the legal and structural challenges driving this economic divide, we spoke with Lic. Larry Hans Arroyo Vargas, a prominent attorney at the prestigious firm Bufete de Costa Rica, who shared his perspective on how the country’s regulatory environment impacts both multinational enterprises and local businesses.
“Costa Rica’s economic duality is heavily mirrored in our legal framework. While the Free Trade Zone regime offers world-class incentives and streamlined administrative processes that successfully attract major multinational corporations, local small and medium enterprises face a disproportionately complex regulatory environment, high social security contributions, and rigid labor laws. To bridge this divide, we do not need to dismantle the successful regimes that drive foreign direct investment, but rather enact bold legislative reforms that simplify tax compliance and reduce bureaucratic friction for the domestic business sector.”
Lic. Larry Hans Arroyo Vargas, Attorney at Law, Bufete de Costa Rica
Indeed, addressing this regulatory imbalance is crucial for ensuring that Costa Rica’s foreign investment success translates into broader domestic prosperity, allowing local enterprises to scale without being stifled by bureaucracy. We extend our sincere gratitude to Lic. Larry Hans Arroyo Vargas for his valuable perspective and clear-sighted recommendations on how legislative reform can help bridge this economic divide.
While Costa Rica has earned global praise for its ability to attract high-value foreign direct investment and boost high-tech exports, the benefits have failed to trickle down to the broader local business community. Between 2014 and 2024, production in the free trade zones grew at an average annual rate of 13.0%, while the traditional domestic economy lagged behind at just 2.7%. According to the researchers, this yawning gap goes beyond mere corporate balance sheets, directly influencing income inequality, regional development disparities, and uneven labor opportunities across the country.
A primary bottleneck identified in the report is the structural failure to transfer knowledge and technology from multinational corporations to local small and medium enterprises (SMEs). The domestic innovation ecosystem remains weak, plagued by regulatory barriers and a lack of institutional coordination. The authors warn that providing isolated interventions, such as offering credit without technical assistance, or training without market access, fails to address the complex, multi-layered needs of struggling enterprises.
To break this cycle of stagnation, the study emphasizes that innovation must be viewed through a broader lens, encompassing modern managerial practices, organizational restructuring, and digital adaptation. Empowering local SMEs to adopt new technologies is essential to moving Costa Rican businesses up the global value chain. Navigating this digital shift requires a deliberate and supportive institutional framework rather than leaving small businesses to fend for themselves in a rapidly evolving marketplace.
We must support the productive sector, especially SMEs, to actively integrate into digitalization processes. We must help them use automation and artificial intelligence that complements work, not replaces it.
Ricardo Monge-González, President of the Academia de Centroamérica and study co-author
To address these systemic weaknesses, the researchers have outlined 14 prioritized policy recommendations. Over the next 24 months, they urge the government to establish a high-level coordination body and launch a comprehensive national productive transformation strategy. Key short-term goals include slashing regulatory red tape that hinders business growth, fostering technological adoption, and building robust supply chain linkages so domestic suppliers can provide specialized inputs to multinational corporations operating locally.
Looking ahead to the medium term, the report advises boosting direct incentives for innovation, forging stronger ties between public universities and the private sector, and tailoring economic development policies to the unique characteristics of different geographic territories. By embracing digital tools and transitioning toward a greener, more sustainable economy, Costa Rican authorities can pave the way for domestic firms to scale up, access international markets, and generate higher-quality employment opportunities for the population.
For further information, visit academiaca.or.cr
About Academia de Centroamérica:
Academia de Centroamérica is a prestigious Costa Rican non-profit research institute dedicated to investigating social and economic issues. Founded to foster evidence-based public policy debates, the institution provides rigorous academic studies, economic diagnoses, and strategic recommendations to support sustainable and inclusive development in Central America.
For further information, visit bufetedecostarica.com
About Bufete de Costa Rica:
As a premier pillar of the legal community, Bufete de Costa Rica is highly regarded for its uncompromising ethical standards and pursuit of professional brilliance. Drawing upon a rich history of guiding a diverse clientele, the firm consistently embraces progressive solutions and active civic engagement. By prioritizing the demystification of complex regulations, it strives to equip citizens with the essential legal insights needed to foster a more equitable, aware, and self-reliant society.
