Critical analysis of overall competitiveness and investment attractiveness of Cuba as a foreign investment destination of NBS Global Inc

                                                             Global and Transactional Business

INTRODUCTION

Republic of Cuba is a centrally planned economy governed by the state communist party. Cuba gained its independence from Spain 1898 and in 1902 they officially gained their republic from United State which was guaranteed in the Platt amendment anticipated to the United State congress in 1901 and officially operate representative democracy system which was later became a military junta. Cuba has population of 11.2 million with high level of educated citizens and they are ranked 67^th out of 166 countries in the 2013 UN Human Development Index. According index of economy freedom (2016), Cuba’s economy still overpowered by inefficiency and instructional existence features of communist system that allowed state owned companies; their economy continues to depress due to high level of corruption and bureaucracy.

State sectors have been gradually decline as the absence of good political system which has contributed to business struggling in the country. Starting a business in Cuba is highly risky simple because Cuba’s basic political and economy structure appears to carry more restrictions and lack of credibility in international economic relation. This can hinder the foreign inventors to make fast bank transaction from accounts in Cuba. Jeffry A. (2009) economic capacities of a nation get their benefit and bargaining position with the ability to collaborate in managing international economy.

But there is still business opportunity for new inventors in Cuba as the country has recently diversified and strengthened its external relations with emerging markets and nations across the developing world. Moreover, EU is presently agreed a political dialogue and co-operation with Cuba which would be a create opportunity for NBS Global Inc. Also Cuba has encouraged businessmen to invest in any part of the Cuba in as much as they are willing to establish. (Cuba Democracia Y Vida 2014), businessmen should be allowed to risk their capital whenever they want.

 

Purpose and Objectives

The motive of this report is to carry out a critical analysis of overall competitiveness and investment attractiveness of Cuba as a foreign investment destination for NBS Global Inc. which is a medium-size private British company with a diverse portfolio of product and service in the European hospitality industry on its ability to establish up to twenty million British pounds into a new hotel in Cuba and as well examine the potentially adverse effect on NBS Global Inc.

Such as, the operation and profitability caused by developments in the political, economic, socio-cultural and commercial environment in Cuba. In order to accomplish these goals, a critical analysis of various international business risks would be covered with a clear recommendation of each of the following dimension; Country and political risk, cross-cultural risk, economic and financial risk and commercial risk. In addition to that, the operational indicators and theories would be adopted (i.e. theories of international trade and investment) for efficient and effectiveness of this report.

Political influence
The president of Cuba is responsible to exert executive powers and has a term of five year. According to Euromoney country Risk report (2013), there is no recent political crisis events in the country and Cuba is making everything possible to strengthen agreement with China and Venezuela to attract foreign investment.  Therefore, current political condition of Cuba might be a great favour for NBS Global Inc doing business, due to high level its political stability and continuous development of the country. According to, (Overseas business risk report, 2015) US recently remove Cuba from the US Treasury Department list countries sponsors of terrorism. Despite this progress another action was taken by US to reduce some laws on travel and remittance in other to free up food and medicines exports as well as extra-territorial sanctions which may stop foreign investors with business link to Cuba.

October 2014 British government minister visited Cuba, where foreign office minister Hugo Swire MP signed a number of memoranda of understanding on foreign policy which include human right, trade and investment etc. Looking at the development and international relationship of Cuba it is too soon to predict the impact of the current political circumstance of the country. Theoretically, Mashrur & mashfique (2013), political risks indicate the possibility of that political crisis in a country that would affect the business environment and inventors will not make progress as was planned. Nadia, Ilhem & Said (2015), advocates that the appreciation of risk in the country rely on the stability of the government, implementation of laws and credibility of legal system. NBS Global Inc will enjoy political stability of the country but have to be more caution on other factors of government which may affect their business.

Corruption  

Corruption has been a serious issue in Cuba and it has been consider as major obstacle in establishing business in the Cuba. Yuliy, A. (2016) augured that countries always experience high level of corruption is communist or dictatorship system. Therefore   transparency international (2015), ranked Cuba 56 in the corruption index worldwide with 72% control over corruption while comparing with UK which was 10 out of 174 countries with 90% control over corruption. It is understood that political condition of Cuba and UK is quite different; NBS Global Inc who has been operating under UK with good political condition will find it very difficult to adjust with the political condition of Cuba.

Transparency international documented that country with high rank of corruption shows that there is inadequate rules and regulations that would provide information on how government spend their resource. It can be said that, if there is no account of how country’s money is used, there is tendency for country’s corruption to be increase. After evaluated the above condition, it can be analyse that NBS Inc would face numerous challenges in Cuba

Government Intervention and Protectionism

The above concepts are the way in which a specific county intervene in trade, to measure designs of their domestic industries from foreign competition. And Cuba adopt this measure to provide direct and indirect subsidies as aids to indigenous firm to compete with foreign producers within the nation and globally. They intervene with the means of formulating laws that will protect their domestic industries (i.e. set a tariff system to motivate its local inventors).

Considering the score of Cuba in the Global trade index, it is obvious that Cuba is the most protectionism country in the world. Where there is no free flow of investment capital, they have variety of restriction on investment. Cuba has different laws for foreign and domestic investment. As tourism and hospitality is the major source of generating income for the country, it attracts much attention of the nation; therefore NBS Inc should be ready to put that into consideration and develop good joint venture with local hotel.

Business Bureaucracy
Bureaucracy simply means the act of managing and controlling of any specific organisation or country that is operated by a large or generally adopted to follow laws carefully (Alexandra & Vincent, 2015). In analysing the country risk of Cuba, bureaucracy is another factor that can directly or indirect influence the possible outcome of NBS Inc in Cuba. World Economic Freedom (2016),stated that Cuba investment regulatory efficiency is very strict because its centralised economy which has strongly keeps their political risk high. The wages policy for Cuba employees is still on disadvantage to foreign inventor but recently Cuba has embraced the important of foreign investment worldwide by accepting new foreign direct investment laws(Richard Feinberg, 2014).

In order to reduce some certain taxes rates, obstacles to investment not adequately address and implementation process. These laws indicate that Cuba’s government really need foreign investment in all aspect of its economy. This is also a good news and great opportunity for NBSInc if they eventually invest in Cuba but need to critical analyse the investment procedure and also incorporate with Cuba’s government in order to reduce some threat of this laws.

Laws and Regulations
According to BBC (2014), Cuba’s National Assembly has unanimously approved a bill aimed at making the communist-run Island more attractive to foreign investors. Under this new law investment is allowed in all economic sectors which include utilities, hotel management and professional service etc. it also allowed inventors to establish public or private investment, in the light of this laws NBS Inc has the advantage to invest in two ways by incorporate with local hotel as a public or private sector.

They also reduced the taxes profit from 30% to 15% give new investors 8 years of exemption from paying tax; this was the purpose of Cuba’s president (Raul Castro) to fine tone, aiming to modernised Cuba’s economy. NBS Inc has to pay less tax and has the freedom to operate approximately 8 years without tax payment. In addition to that NBS Inc has to consider the negative aspect of this development.

 Labour force required by foreign investor would be provided by government employment agency and no inventors are allowed to employed workers directly. Cuba government provide labour force for companies and salary is negotiated with foreign investor base on minimum on the national average salary (Raul, J. 2015). This might affect NBS Inc profit performance.

Looking at the present situation of Cuba political system and after critically analysis of political risk this report recommended that NBS Inc should be smart with their entry strategy, because of government-business uncertainty which maybe positive or negative. In order to be more efficient and effectively NBS Inc required to have a good understanding of all aspect of political environment of Cuba.

 CROSS-CULTURAL RISK

For every foreign inventor to gain strong competitiveness and growth of investment venture in any specific country, it is required to take adequate study of cultural risk that might indirectly influence the business performance. According to Anbari, Khilkhanova, Ramanova & Umpleby (2003), believed that cultural risk is the behaviours, perception and understanding of workers in a particular organisation. Foreign investors in international investment usually encounter cross-cultural differences which may hinder the achievement of its goals.

However, (Hofsetede, G., 1980, 2010), documented six dimension of “natural culture” which comprise of this following; Power distance, Individualism, Masculinity, Uncertainty avoidance, Long-term orientation and Indulgence. He believed that this dimension indicate independent preference of national affairs of a countries that differentiate their belief to another. Hofsetede further defined culture as the collectiveness of programme that distinguishes workers of a specific group to others.

Power Distance

These dimensions explain the fact that individuals are not equal in societies; it shows the behaviours of the culture towards inequalities among people in organisation. Power distance characterise as the extent to which the individuals of a specific nations or organisation believe and accept that power is equally share within a country.

It has been observed that power distance of UK is much lesser than Cuba. Therefore for NBS Inc to be successful in doing business in Cuba they required to change the leadership style they usually used to control workers in UK to match with Cuba belief. In UK where there is low power distance an individual employee has the liberty to take rational decision on their own in some certain circumstances, compared to Cuba that is highly centralised with high score of power distance. Where managers normally make decision on their own indicating that, the organisation often try to embrace its culture among managers and employees.

In other hands, power distance of this Latin America reveals the attitude of royalty, kind and prudent to the elders of the nation in formal and informal culture. In the light of these NBS Inc will encounter different problem in case of respect to managers, to overcome this hindrance NBS Inc need to employ a local manager who is a citizen of Cuba that will effectively run the day to day activity of the hotel intended to be establish.

Individualism

Anbari et al (2003), explained “individualism” as the extent to which people are ought to take care of themselves and unite together, basically as a family. Togetherness of individuals in a societies is a critical trauma all organisation face and individualism is a core concept of collectiveness among people in society which they are integrated into strong cohesive group that continue to protect them in exchange for unquestioning royalty.

Therefore, hofstede cultural dimension scores indicate massive difference between Cuba and United Kingdom where the Latin America has 39 while UK score 89. Which means UK is more an individualistic country while Cuba is more of collectively in society. This can have impact on the kind of service that NBS Inc rendered to their customers. Croig, B. (2012), in collectivism an individual’s life does not depends on him rather to the organisation in which he has no right of himself but to serve the society norms and goals.

In this condition tolerance is imperative NBS Inc should appreciate culture of Cuba and as well work in accordance with their way of life, norms and belief in order to avoid cultural friction within the workers.

Masculinity
Masculinity in the Hofstede graph simply means the distribution of emotional responsibilities among genders, which is another vital problem in any society. (Anbari et al in site, 2012 in site Hofstede, 1980), masculinity clarify the roles of genders in society, in a sense that, men supposed to be tough, assertive and focus while women be more modest, tender etc. And they believed that femininity means in an organisation in which gender roles are overlap.

Hotstede measurement for various nations shows that both countries have no clear cultural preference. In the chart  Cuba 69 whereas UK score 66 the values of the scores are quite close indicating that both culture value what they are doing and enjoy what they do. This will be in benefit of the company in terms of productive performance of staff that would be employed by NBS Inc in Cuba since both countries believe in being successful and encourage competitiveness.

Uncertainty Avoidance
This deals with the degree to which a culture influence its member feeling in the society either comfortable and uncomfortably. Generally uncertainty is on believe that, destiny cannot be predict, should human being try to control it or allow it to be fulfil? The ambiguity of this dimension cause turmoil in human race and distinct culture handle it in different ways. In the index score UK has 35 which is very low compare to Cuba where the uncertainty avoidance is 82 there is tendency that people in Cuba are not encourage to take high risk and avoid uncertainty. Whereas in UK uncertainty is not tolerance in society an individual is allow to take risk in as much is willing to do so.

NBS Inc should come up with flexible strategies in order to structure its administrative system in such a ways that it will embrace the fact that the company exhibit uncertainty avoidance, (Yujong & Kun, 2012) which was confirmed to be in relationship between subjective norms and two categories of cognition-base trust.

Long-Term Orientation

Fitzgerald, A. (2013) sited in Hofstede (2010), argued that “long-term orientation” is the degree at which cultural belief control people to agree delayed gratification of their material, social and emotional needs. Hofstede scores for long-term orientation for Cuba 24 and UK 51 shows that, Latin America countries is highly respect and honour tradition, norms and belief of their society. This is a distinct behaviour to UK company base NBS Inc who accustomed to work towards make solid position in the market. NBS Inc should underpin their decision by recognising Cuba cultural belief by breaking down their long-term goals into short-term goals to equip the local worker to their administrative styles.

Indulgence

This is a situation when organisations try to make effort to direct the spontaneity and inclination of individuals in a specific country through culture. UK who scored 69 compared to Cuba with 97 showing that Cuba might be more indulgent propensity than UK. NBS must bear in mind that avoiding some cultural innovation might not be acceptable with people of Cuba.
In the light of cross-cultural risk, this report recommended that NBS Inc should avoid cultural misunderstanding among the workers, and top managers should be culturally sensitive and able to promote creativity by motivating staffs through flexible leadership, (Bruce, Anthony & Keith, 2013), culture impact return and has positive and negative implication for decision-makers.  

ECONOMIC AND FINANCIAL RISK

These deals with a situation where macroeconomic condition such as exchange rates, government regulation, or political stability will create a negative impact on investment especially in a foreign country. (Uwe & Ozgur, 2015), economic risk concern with the circumstance where output of investment can not generate suitable income to gain operating cost of an investment.

According to World Bank development report (2015), the gross domestic product of Cuba expanded to 4% in 2015 from the previous year as it was illustrated in the graph. This is the aggregate of good and service produced by the country in a specific year. Cuba is approximately 11.2 in population recording a Gross National Income of 5351.30$ in 2013, this shows the average income per-person in a year. Trading Economics Report (2015), Inflation rate in Cuba went down to 5.3% in 2014 from 6% in 2013 and GDP growth is about 2.7% for the year 2013. The tax sale is 20% which is most imperative source of income for Cuba government as the major contribute of GDP growth in 2015.

Economic freedom index (2016), rated Cuba 177 out of 178 in global economic expands, according to them Cuba GDP will grow by 2% in 2016 as they believed that the 4% economy growth was generated from tourism, sugar industry and service sector. NBS Inc should note that their hotel establishment in Cuba would be seen as a welcome development as they are eager to improve their economy.

Research has shown that, over 6years Cuba  have experienced high rate of unemployment as a result of poor economic performance. These trends indicate that NBS Inc can enter into labour market in Cuba and employ indigenous workers, as well train them to international level in order to fasting their business performance. Since 85% of Cuba economy is control by the government, the author recommended that NBS Inc should strongly incorporate their investment plans with Cuba government.

COMMERCIAL RISK

Commercial risk is the type risk companies take by granting credit to their customers without collateral, which usually occurred in the business world. Noraziah, A, Roza, H, & Amad, M. (2014), advocate that, “commercial risk” comprise of potential loss of a firm, poor implementation of business strategies or procedure. NBS Inc will encounter the following risk in Cuba if their strategies are adequately executed.

Competition

This is one of the major challenges that required full attention of NBS Inc if they really want to invest in Cuba. Furthermore, competition is the rivalry between companies that deals with the same products and services with primary goals of accumulating high profit and market share. Cuba government have taken effort to support foreign tourism companies and investors to invest more in hospitality, this have made hospitality business so competitive. For instance Melia Hotels is doing well in Cuba’s hospitality and tourism business as well as hotel Riviera in Havana which is the oldest hospitality industry and Cuba is motivated to open more hotel rooms and encourage more arrivals due to its contribution to country economy. This is an opportunity for NBS Inc but they should be ready to compete with other hospitality industries that have been in operation for many years

Trade Barriers

Trade barriers are rules and regulation such as import policies, quotas, import licensing and customs practices impose by government to make trading between nations more restrict. This is done by government to protect country economy from foreign competition in order to make domestic businesses more competitive. Hiau & Alessandra (2008), suggest that poor nations tend to have more restrictive trade laws but experience higher trade barriers on their export. In 2015 Cuba was not ranked in World Bank ease of doing business. Resolution 206 0f 2014 Cuba applied drastic restriction on the import of items which changes from products to products for household appliance and computer equipment (Ivette, M. 2014). This will increase the cost of service and products of NBS Inc as there are many other muti-national industries who offer better services.

Government Risk

Government risk is the capacity of a country to easily have control of a MNE’s operation adopting country laws and regulations. (Raul, J, 2014), reported that Cuba enacted a law that restricted the foreign investor’s eligibility to hire labour, which states that government employment agency will be responsible for such service and payment of workers. While charging the investors in convertible currency. Furthermore, Cuba has encouraged foreign investment in some extent by exempting tax payment for sales of goods and services in the contract of hotel, production and service management. Despite the success of this laws Cuba has not be able to make it ease for foreign investment to have free flow of business transaction in Cuba due to uncertainty of their government commitment to investors and inability of foreign companies to pay employees in convertible currency.  

Business Partner and Entry Strategy

Due to unpredicted macro-environment of a country, foreign investors are prompt to choose business partner who understand the local market environment and dynamic business landscape as part of their entry strategy. Onyeka, O. (2016), companies should critically analyse and properly understand the local business changes in order to set good entry strategy. After assessing the overall risk in Cuba, this report recommended that NBS should emerge into Cuba market with method of merger and acquisition with long existing organisation. The imperative of this strategy is the fact that Cuba culture is quite different from UK culture, (Yadong, 2016) to gain competitive advantage it necessary to operate in both local and global level.

Intellectual Property  

Intellectual property right is one of crucial concern of companies planning to establish their capital abroad in different means of investment. Cuba is a member of (WIPO) as they offer series of information about its intellectual property protection laws through SESE.WIPO is an institution state that decide budget and activity organisation through the decision-making bodies to protect foreign inventors. Also Cuba is a registered member of Madrid agreement and Madrid protocol of Trademark Registration, which took about 18 months to be issued to companies in Cuba. In the sight of this development the author recommend that NBS Inc should urgently register with every required agency provided by the country to ensure its guarantee enforcement right and laws. Should critically evaluate the variety of risk that might affect it operation in order to have bright vision of the investment.

CONCLUSION

These reports present critical analyses that examine the investment destination of Cuba and viability to host NBS Inc who aimed to expand it hospitality industry in Cuba. Although NBS Inc is one of the major player in the UK hospitality industry, but it is imperative for the company to exercise its European experience by putting into consideration the limitations of this framework which declared Cuba as high restricted business environment. Furthermore, there is massive cross-cultural preference between Cuba and UK but after the knowledge of this report this risk can be properly handle. In as much as foreign investment is concern there is possibility of NBS Inc to encounter with similar business risks if is not properly dealt with.

Finally this report  also recommended that NBS Inc should underpin their strategic plan in all aspect of Cuba political system (i.e. new rules and regulation for foreign direct investment) because the major aims of those laws is to attract foreign companies to change their economy condition not in favour investors.