Kellogg Risk Lab

Supplying Growth: Purchasing Challenges and Opportunities for Cuban Entrepreneurs

The July 2015 was conducted by four MBA students at the prestigious Kellogg School of Management, and analyzes price advantages for the sourcing of capital inputs in the U.S. and Cuba along nine different categories of approved private enterprise. The report was supervised by Dr. Russell Walker, Clinical Associate Professor at the Kellogg School of Management, an expert in big data analytics, risk management and international business strategy. 

Among the report’s key findings are:

  • There is a price advantage in Cuba for many necessary business input when accounting for applicable tariffs and transportations costs, yet Cuban entrepreneurs continue to source a large number of supplies from the U.S. This suggests that Cuban entrepreneurs may purchase some goods in the U.S. for reasons other than price, such as product availability, variety and quality.
  • Not all individual products are cheaper in Cuban hard currency retail stores or the Cuban secondary market, however; appliances and high-tech goods are often less expensive in the U.S., even when accounting for high tariffs, and entrepreneurs may be able to reduce the high costs of technology-intensive ventures by purchasing the right goods in the right markets. 
  • Combining the pricing data in this report with existing research on estimated monthly revenue for Cuban entrepreneurs in different sectors indicates that some entrepreneurial activities may have significantly shorter payback periods than others, suggesting potential opportunities to help aspiring Cuban entrepreneurs identify promising business opportunities.

The findings in this report reinforce the importance of educating Cuban entrepreneurs to help grow their small businesses, improve their livelihoods, and strengthen the burgeoning entrepreneurial sector on the island. This analysis identifies four specific opportunities for enhancing the research on and support for entrepreneurs in Cuba.

Policy Recommendations

The Cuba Study Group has identified the following remaining obstacles to the full implementation of the President’s goal of assisting Cuban entrepreneurs: 

  • Remittances Funding Startups: Family remittances play a key role in providing the financing for private businesses. However, with the import of Cuban goods and services, more U.S. persons will be incentivized to remit to non-family member on the island and will be faced with a $2,000 per person, per quarter limit. i.e: if I want to import services from programmers, but they require startup capital to obtain a license and buy equipment, I am limited by non-family remittance requirements. 
  • Banking Services for Exports: U.S. banks continue to avoid transactions to Cuba, even when such activities are licensed. The potential risk to the rest of the bank’s assets exceeds the reward that these small transactions represent for their total volume. This is an example of how U.S. policy changes alone are not resolving a key problem. As a result,  remitters are forced to resort to Western Union, which is impractical for larger transfers, and stunts the development of formal credit and the ability of entrepreneurs to receive payments for approved exports to the U.S. 
  • Shipping Methods: While new U.S. regulations allow the import and export of certain products and services to and from Cuba, the method by which these goods are shipped remains unclear. Some services in Miami such as Va-Cuba do provide shipment services, but the uncompetitive nature of these services keeps prices high and access low. In addition, Cuba entrepreneurs who want to export their goods must either travel to the U.S. with the goods, or make arrangements with mules, neither of which is a reliable solution for retailers in the U.S. 
  • Prohibited Imports (515.582): In January, we advised regulators to publish a list of prohibited imports as opposed to a list of authorized imports in order to create the greatest possible amount of flexibility and opportunity. We were surprised however by some of the items that remained on that list, including: certain textiles and textile articles, spirits, tobacco, machinery and electrical equipment. The blanket prohibition of these articles unfairly targets entrepreneurs in certain categories of work. We believe such exceptions should take into account the volume of such exports if protecting local industries is the objective.

As such, we propose the following executive actions in order to facilitate the expansion of private enterprise in Cuba:

  1. Eliminate the limit on non-family remittances to approved recipients in Cuba. 
  2. Allow independent Cuban entrepreneurs to open bank accounts in U.S. financial institutions. Facilitate the opening of more corresponding accounts in Cuban financial institutions. 
  3. Clarify current policy so to as make clear the actual mechanics of importing or exporting via an official Cuban channel. Prioritize an agreement on direct mail service with Cuba and issue a general license for the operation of reliable shipping (Fedex, UPS, DHL) to Cuba. 
  4. To the extent that certain prohibitions on import from Cuba are necessary to protect certain U.S. industries, discriminate based on volume in order to allow small-scale Cuban entrepreneurs to benefit from access to the U.S. market without disrupting domestic industries. 

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