Foreign Direct Investment in Cuba : A study on the 2014 reforms

Abstract: Since the Soviet collapse in 1991, Cuba tried intensively to attract foreign direct investments in order to improve the economic situation. The first reform was made in 1995, which was not a success, since both foreign direct investment and joint ventures decreased in the beginning of the 21st Century. In response, the government implemented a new law concerning foreign direct investment in 2014, with more relaxed regulations and increased benefits for the investors. This study aimed to examine whether the 2014 reform had solved the problems that existed under the previous law and the new reforms had helped Cuba’s exports. The purpose was therefore to investigate to which industry foreign direct investment should be allocated. The study took two approaches. First, it applied the Revealed Comparative Advantage model to distinguish effective from ineffective industries. It included a field study that aimed to gain understanding of the effect the new law has had so far, and whether it could improve exports. In addition, the field study attempted to determine where foreign direct investment should be allocated. The results indicated that Cuba has a comparative advantage in two industries: mining and agriculture. These industries were therefore examined in the field study. Key findings showed that ongoing issues, such as bureaucracy, lack of legal security and the wage policies of government employment agencies still exist, despite the introduction of new legislation. However, the new law may create increasing export possibilities in the food and mining industries, since Cuba has an outwardly-orientated policy and large factor proportions in agriculture and mining that could be exploited.