An Information Service of the Cuba Transition Project Institute for Cuban and Cuban-American Studies University of Miami

 

José Azel*

 

     Since the announcement by the Cuban government that octogenarian Fidel Castro had transferred power to his brother Raul, there has been increasing speculation regarding political and economic changes in Cuba and the implications for American businesses. A generalized belief has developed that a post-Castro, post-embargo Cuba will result in a business bonanza for American companies. Observers point out that after nearly fifty years of totalitarian rule and a failed command economic system, Cuba and its population of over eleven million are in desperate need of practically any product and service conceivable.

Exports vs. Foreign Direct Investments – A Business Perspective

     A more critical examination of Cuba’s ability to attract U.S. foreign direct investment (FDI) in post-Castro yields a different conclusion. From the point of view of the strategic choices of firms that will be weighted by corporate executives, need or market size alone will not justify an FDI commitment. Typically, firms seek to mitigate international risks by starting with low risk/low cost market entry options, such as exporting, and advancing to higher levels of risk and control FDI; only if beneficial to the firm and/or competitively necessary.

     Certainly, in a post-embargo environment U.S. companies will want to export their goods and services to Cuba. From a corporate perspective, exports (foreign sales) are the preferred entry method for a company to serve a market such as Cuba, while minimizing business and political risks. But exports by U.S. companies to Cuba will not directly contribute the capital, technology transfers, and other desirable components of direct investments that will be so desperately needed in post-Castro Cuba. A firm looking to sell to Cuba is not equivalent to a firm investing in Cuba.

     Generally, firms invest in a foreign market to (1) gain access to a location specific natural resource, such as oil or minerals, or a tourist destination (resource-seeking investments); (2) to establish feeder plants to take advantage of lower local production costs (efficiency-seeking investments); or (3) to supply the local market (market-seeking investments). Regarding resource-seeking FDI, Cuba will indeed attract the interest of U.S. companies particularly in oil, nickel, agriculture, and tourism. Even under the very unfavorable conditions for FDI prevalent in the Castro era, some international companies have sought to invest in these areas.

     But, with an abundance of low labor cost countries around the globe that firms can choose for efficiency-seeking investments, it is unlikely that Cuba will be able to attract this type of FDI. The Cuban labor force, after almost five decades of operating in a command economic system, is ill equipped for the demanding labor requirements of a modern market economy. Comparatively speaking, Cuba does not offer U.S. companies seeking lower labor costs a compelling reason to invest in the country.

     In terms of market-seeking FDI, Cuba may appear to offer a meaningful opportunity. But, Cuba represents an impoverished market with minimal disposable or discretionary income. Second, when compared to the populations of large countries such as China, or India, Cuba’s comparative market size does not rate highly to be selected for a FDI geared to supply the local market. Third, Cuba’s internal market may be inadequate to support investments in production facilities that require a much larger consumer base in order to achieve the necessary economies of scale. Fourth, production in a Cuba-based facility will be handicapped by having to import many, if not most, of the components and parts required in the production process as few will be available from Cuban production sources. Finally, and perhaps most importantly, U.S. companies, if able to export their goods to Cuba, will elect exports as a much lower cost and lower risk market serving strategy.

     Therefore, from the vantage point of corporate executives, there is no reason to expect that U.S. firms will rush to invest in a post-embargo Cuba. This remains the case even if we postulate a best case scenario where a smooth democratic and market based transition is taking place, and the Cuban government is policy-friendly towards U.S. investors. Given this discouraging outlook, what steps can be taken by a future Cuban transition government interested in attracting FDI and a U.S. administration wanting to encourage American companies to invest in a democratic Cuba?

A New Business-Specific FDI Policy Formulation Approach

     Both on the U.S. and the Cuban side one approach anchored on the principles of business strategy is to foster a competitive urgency to invest in a democratic market oriented Cuba. This can be accomplished by rewarding first-moving firms with a substantial and sustainable competitive advantage. In business strategic planning, the concept of competitive advantage calls for cost-effective efforts to alter a company’s strength relative to that of its competitors. For companies the strategic value of a competitive advantage depends on its sustainability. Sustainability, in turn, exists if competitors find it difficult to replicate or imitate the source of a firm’s advantage.

     For example, in terms of policy formulation, a creative package of tax exemptions, deferrals, duty-free access to the U.S. market and other incentives can be made available only to those firms that have established a production facility in Cuba by a given date -say within two or three years after the embargo has been lifted. The idea behind this timing provision is to utilize an institutional entry barrier to provide sustainability to first-moving firms. In the competitive environment created by such a policy, a Cuba-based facility becomes a compelling competitive necessity in order to avoid a disadvantageous position.

Cuban-Americans as a Catalyst for Foreign Direct Investments

     Additionally, a post-Castro Cuba will have access to an exceptional country-specific comparative advantage: The Cuban American community. In terms of facilitating FDI in Cuba, Cuban-Americans can play a pivotal role not only as entrepreneurs owning small and medium size businesses, but also as executives working in large national and multinational enterprises. For post-Castro Cuba, the capital and skill sets of the Cuban- American community represent a comparative advantage unlike that of any other country competing for U.S. foreign direct investment.

     Cuban-Americans, for the most part, will not be hindered by the innate disadvantages of foreignness and their investment decision-making will not be bound by strict economic rationality. The investment decisions of Cuban-Americans will be based on a different and very personal risk-reward analysis and many will seek to invest for reasons totally unrelated to resource, efficiency or market seeking motives. Moreover, in a transition setting lacking a modern legal system conducive to sophisticated contractual arrangements, a Cuban-American businessperson will be more amenable to enter into formal or informal contractual arrangements with a Cuban partner than say, a publicly traded U.S. company.

     Typically, in U.S. businesses, someone within the corporate structure has to “carry the flag” for a particular project. Someone has to be a “champion” persuading other executives of the wisdom of a given course of action. This is precisely the role that Cuban-American executives can perform within the U.S. corporate world; they can carry the flag for their companies’ Cuban FDI venture. Thus both as entrepreneurs and as corporate executives, Cuban-Americans can be FDI first-movers catalysts.

     A future Cuban transition government needs to set aside whatever hostility it may harbor for Cuban-Americans and employ the conceptual sophistication to recognize that their exceptional skill sets will be essential for the island’s speedy economic reconstruction. There may indeed be some economic opportunism at play, but many successful entrepreneurs and executives in the Cuban-American community also feel duty-bound to contribute whatever skills they may posses to the reconstruction of their homeland. To a post-Castro Cuban transition government seeking to attract U.S. FDI, Cuban-Americans represent its “ace in the hole” –a hidden advantage or resource kept in reserve until needed; an opportunity to turn failure into success.

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* This is a summary of a larger study being prepared by Jose Azel, Senior Research Associate at the Institute for Cuban and Cuban-American Studies (ICCAS), University of Miami. A longer version will be published in Cuban Affairs, the quarterly electronic journal published by ICCAS, in its January issue. Dr. Azel has a comprehensive general management background integrating broad functional experience in corporate governance, organizational development and finance with interdisciplinary, scholarly research in international business studies.