Costa Rica's Political Crossroads: Balancing Stability and Structural Reforms to Sustain FDI Momentum

Costa Rica's foreign direct investment (FDI) landscape in 2025 presents a paradox: record inflows of $4.3 billion in 2024, driven largely by U.S. capital, coexist with political turbulence and structural vulnerabilities that threaten long-term stability. This duality underscores the broader challenges faced by emerging markets in balancing political governance, economic resilience, and investor confidence.

Political Turbulence and Institutional Resilience

Costa Rica's political system, often lauded as one of Latin America's most stable democracies, has faced growing polarization in 2025. Tensions between the executive and legislative branches have hampered efforts to implement transformative reforms, particularly in fiscal policy and infrastructure developmentRisk Atlas 2025: Costa Rica Grows Strongly, But Faces Political Tensions^[1]. According to the Risk Atlas 2025, these dynamics have raised concerns about state efficiency, with social protests occasionally erupting over austerity measures or policy shiftsRisk Atlas 2025: Costa Rica Grows Strongly, But Faces Political Tensions^[1]. While democratic institutions remain robust—bolstered by strong rule of law and low corruption—such instability creates uncertainty for investors.

The OECD Economic Outlook warns that increased economic policy uncertainty in 2025 could dampen FDI inflows, as multinational corporations recalibrate their global strategies amid trade conflicts and shifting U.S. industrial policiesOECD Economic Outlook, Volume 2025 Issue 1: Costa Rica^[3]. For Costa Rica, this is compounded by its heavy reliance on U.S. investment, which accounted for 67% of total FDI in 2023U.S. Foreign Investment Fuels Costa Rica’s Growth—But at What Cost^[2]. A report by Tico Times highlights that while U.S. capital has fueled growth in technology and manufacturing, overdependence on a single source exposes the economy to external shocks, such as potential tariff escalations or domestic policy shifts in WashingtonU.S. Foreign Investment Fuels Costa Rica’s Growth—But at What Cost^[2].

Structural Vulnerabilities: The Hidden Costs of Growth

Beyond political dynamics, Costa Rica's structural weaknesses remain a critical barrier to sustainable FDI. Infrastructure gaps, particularly in transportation and energy, persist despite recent investments. As noted by the Risk Atlas 2025, 37% of the country's road network is in poor or very poor condition, inflating logistics costs and reducing competitivenessU.S. Foreign Investment Fuels Costa Rica’s Growth—But at What Cost^[2]. Meanwhile, high energy costs—driven by a mix of renewable and fossil fuel sources—pose challenges for energy-intensive industriesU.S. Foreign Investment Fuels Costa Rica’s Growth—But at What Cost^[2].

Education underperformance further constrains long-term growth. While Costa Rica allocates 6.3% of GDP to education, learning outcomes remain below international benchmarks, limiting the country's ability to advance in high-tech manufacturing or innovation-driven sectorsU.S. Foreign Investment Fuels Costa Rica’s Growth—But at What Cost^[2]. These structural issues, coupled with political gridlock, create a "growth paradox": Costa Rica attracts FDI with its stable institutions but struggles to address the bottlenecks that could unlock higher-value economic activity.

Diversification Efforts and Strategic Priorities

To mitigate risks, Costa Rica has pursued FDI diversification, with 22 of 61 new projects in 2024 originating from Europe and AsiaU.S. Foreign Investment Fuels Costa Rica’s Growth—But at What Cost^[2]. The government has also introduced incentives such as tax holidays and import duty exemptions to attract non-U.S. investorsOECD Economic Outlook, Volume 2025 Issue 1: Costa Rica^[3]. These efforts align with broader goals to reduce vulnerability to U.S. policy shifts and global trade tensions.

However, diversification alone is insufficient without structural reforms. The OECD emphasizes that infrastructure development, education modernization, and innovation ecosystems are critical to sustaining FDI momentumOECD Economic Outlook, Volume 2025 Issue 1: Costa Rica^[3]. For instance, CINDE (Costa Rica's investment promotion agency) has supported 73 projects in 2025, but success hinges on resolving energy and infrastructure bottlenecksOECD Economic Outlook, Volume 2025 Issue 1: Costa Rica^[3].

Future Outlook: Navigating Uncertainty

Costa Rica's ability to maintain its FDI appeal in 2025 will depend on its capacity to navigate political and economic headwinds. While the country's skilled workforce and sustainability credentials remain competitive advantages, structural weaknesses and policy uncertainty could deter new investors. The OECD projects that without significant reforms, FDI inflows may stagnate or decline as global capital reallocates to markets with lower risk profilesOECD Economic Outlook, Volume 2025 Issue 1: Costa Rica^[3].

For emerging markets, Costa Rica's experience offers a cautionary tale: political stability alone is insufficient to guarantee long-term investment success. Structural reforms, infrastructure upgrades, and diversified FDI strategies are essential to converting institutional strengths into sustainable economic growth.