The Cuban government’s recent announcement that it intends to allow foreign private investment is fueling the hopes and dreams of those in the business community whose naivety, avarice or moral agnosticism allows them to believe that their financial investment in the island’s economy will turn out to be manageable. , profitable and sustainable.
While the embargo on Cuba has prevented Americans from doing business with Cuban nationals and entities for more than 60 years, the Biden administration recently lifted Trump-era restrictions and authorized a U.S. license to finance and invest directly in businesses small private on the island. .
Undoubtedly, there are sectors of the Cuban economy that present attractive opportunities, such as tourism, energy, agribusiness and biotechnology. But US firms should note that foreign companies from Canada, Europe and Asia enjoy the “first mover advantage” – they know the terrain, the power brokers, the fixers, the suppliers and networks, the culture and the invisible rules of the game. They could also count on their governments to step in to protect their interests because of the loans given to Cuba – especially loans from Spain, Britain, Canada, France and Japan.
Before a company decides to invest in a foreign country, whether it is a “greenfield investment” (building a factory from scratch), a joint venture, or an acquisition, the firm must carefully consider a set of key factors. With trade, a buyer-seller relationship is relatively easy to complete, and each party then looks for a new partner. With investments, the cost of building a brick and mortar facility and dissolving the partnership can be long, complicated and expensive. (Trading is like dating. Investing is like marriage.)
In the case of Cuba, the economic environment, infrastructure, operations, markets (domestic and foreign) and opportunity cost will determine whether a company should proceed.
The first thing companies look for is the general macroeconomic situation and the environment for doing business. In terms of GDP per capita, more than 100 countries are better than Cuba. But in terms of economic freedom (a ranking most important to investors), the country ranks, according to one estimate, an abhorrent 172 out of 184 nations. The categories that make up the rankings include property rights, financial freedom, rule of law, labor freedom and fiscal health.
Potential investors in Cuba should be aware of the extremely poor state of Cuba’s infrastructure. This includes transport links, accommodation, internet and expatriate staffing facilities. Only 17 percent of Cuban households own a computer, and Cuba has the lowest cell phone penetration of any country in Latin America. Water resources and sanitation are also illustrative, with 80 percent of the infrastructure over 40 years old. Furthermore, power outages are not confidence builders for manufacturing companies looking to invest in Cuba.
In terms of business operations, there are numerous problems. Foreign firms present in Cuba may find that their operations are challenged by many factors. These include government bureaucracy, the slow pace of decision-making, and the inability to hire workers and pay them directly. Cuban law generally requires foreign investors to hire workers through public agencies known as “employing entities” (entidades empleadoras). Low levels of worker productivity and high levels of absenteeism also characterize the Cuban workforce.
In terms of markets, last year Cuba exported $1.15 billion (against imports of $3.4 billion), most of which consisted of commodities: tobacco, sugar and nickel. China, Spain, India, Singapore and Germany were the main export destinations. In terms of consumer markets, private income (mainly remittances from relatives abroad) is essential to supplement government wages, as the minimum weekly wage in Cuba is equivalent to a large thin-crust pizza from Domino’s. Half of Cuban spending goes to food, clothing, shoes and hygiene products. With a lack of brand awareness, limitations on pricing, promotions and advertising, consumer goods companies are severely challenged.
Finally, any consideration of foreign direct investment in Cuba must take into account the opportunity cost—investing in an authoritarian nation lacking capitalism versus investing in a democratic nation where a free market system exists, albeit imperfectly. There are much better choices in the Caribbean Basin region, both Spanish and English speaking, for tourism; business and IT process outsourcing; easy production; agribusiness; and logistics and transportation services. The Dominican Republic, Costa Rica, Panama, Trinidad and Tobago and Mexico are the most prominent.
The 16th-century French writer and humanist François Rabelais observed that: “We always desire what is forbidden and desire what is denied us.” The Cuban government’s latest move to authorize direct capital investment to lure foreigners is an act of desperation given the island nation’s dire economic situation. Financially savvy and socially responsible American corporations will embrace this “opportunity” and invest their money elsewhere.
Jerry Haar is a professor of international business at Florida International University and a fellow of the Woodrow Wilson International Center and the Council on Competitiveness. He serves on the boards of the Commonwealth Institute and the World Trade Center in Miami.
