2008-01-23. ICCAS
José Azel*
January 22, 2008.- 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.
_______________________________________
* 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.
http://www.miscelaneasdecuba.net/web/article.asp?artID=13602
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