As part of the MaDI program, we are lucky enough to have regional and country seminars that are based on ‘doing business’ within a particular place around the world. For a Master’s in International Business, seminars like these are going to come in handy. They are given by an industry expert, such as Dra. Leanna Diaz Fernandez and Dr. Luis Barreiro Pousa from Habana University who came to speak to us on 19th May 2018 about doing business in Cuba.
This Month’s regional seminar was slightly different to the others. Instead of focusing on customs and ways of doing business, as such; they focused on a panoramic view of the economy as it is very important to familiarize yourself with the following statistics before doing business in Cuba.
A panoramic view of the economy
The annual growth rate of GDP
If you take a look at the chart to the left, you will notice dramatic troughs and peaks in the annual growth rate of GDP, particularly between 2015 and 2016. The explanation for this is partly due to climate issues, but above all, it is due to the financial restrictions within the economy. When you see peaks in the annual growth of GDP, this is when there has been a period of liquidity, giving the opportunity for Cuba to import products. However, overall GDP remains below 2%. Furthermore, if you take a look at the second chart to the left, you will see the structure of GDP from 2010 to 2016. You will notice
that the main areas of growth are within the commercial sector and the hotel and restaurant sector; which has grown automatically alongside tourism. On the other hand, Agriculture and Construction have remained significantly low.
Cuba has never been known for producing goods or products. It has always offered services and continues to focus on this area. If you take a look at the two charts below, you will see a significant difference in the number of products offered in comparison to services and you will see a comparison between the types of services offered in Cuba and in other countries of a similar size. As Cuba’s economy relies a lot on tourism, there are certain global/political factors that have stunted its growth. For example (as shown in the bottom right image), the collapse of the Soviet Union in the 90s as it was the most important business relationship that Cuba had at that time and the 9/11 terrorist attack in 2001 as this affected tourism worldwide.
Cuba has a particular case when it comes to currency as they have two currencies. They have their national currency, the peso and a recently introduced currency, the “convertible” peso (“convertible” because it is only convertible inside Cuba). The national peso isn’t convertible, for this reason, they used to accept dollars from tourists and international businesses, etc. However, they were penalized for accepting the dollar and banned from using these dollars to do business internationally. This meant that they had a lot of dollars that they couldn’t use or convert. Therefore, a convertible peso was created so that they could exchange those dollars at the bank in Cuba. Moreover, Cuba also had two exchange rates. One for businesses, which was extremely bad; the peso was equal to the dollar and meant that when it came to importing, it wasn’t worth it for the seller and an internal exchange rate of 1:25. Nowadays, Cuba has five exchange rates in order to attract foreign investments which are based on the type and size of a business.
Cuba has extensive external debt which has resulted in Cuba having extreme difficulty when applying for credit with international banks, especially long-term credit. Therefore, they have been using short-term credit to pay off previous long-term credit debts which you can imagine has been a vicious circle. Between 2009 and 2017, Cuba negotiated its debt, and in the last two years, they have managed to lower their payments to 5 million dollars per year, which they continue to pay on time and with loyalty as to not damage their growing reputation.
Currently, Cuba has firm business relationships with Venezuela, China, Spain, Canada, and Brazil. However, it is crucial for Cuba to attract further foreign investment if they want to continue to grow. According to the law, 100% foreign investments can be negotiated within all sectors apart from education, health and armed forces. At the moment, Cuba has a range of mixed companies such as Havana Club, contracts with economic associations such as Accor and completely foreign companies such as CNPC.
In order to organize future foreign investment, Cuba has created a guide of opportunities which is updated each year and shows the types of investments possible and where Cuba wants to be and how it wants to grow as an economy. The most recent guide includes 400+ projects in which foreign investors can get involved. Certain projects have a fixed investment, whereas others are open to negotiation.
Doing Business in Cuba
If you take a look at the doing business chart below, you will see a general guideline as to what needs to be done in order to have a foreign investment accepted. This process can be very slow and bureaucratic and it could take up to a year. For example, if there is an error in your documentation (part of the process marked in red), you would have to start the process again from the beginning!
Hiring foreign employees
Last but not least. All foreign employees must be hired via an agency. If there is someone that you want to hire from overseas, they have to be accepted by the agency first. This can put a lot of investors off.
So, if you are thinking about doing business in Cuba, take a look at the guide of opportunities to see what types of projects you could get involved in. If you don’t mind a bit of bureaucracy every now and again, there could be a world of opportunities at your feet.
In the following video, you can find a summary of the seminar “Doing Business in Cuba”