Paladar or Restaurant El Alba a popular private small
SANTA CLARA, VILLA CLARA, CUBA - 2014/07/08: Paladar or Restaurant El Alba a popular private small familial restaurant which cooks exclusively with charcoal the creole or traditional Cuban food. (Photo by Roberto Machado Noa/LightRocket via Getty Images) Photograph by Roberto Machado Noa — LightRocket via Getty Images
Commentary

What Cuba’s new wave of entrepreneurs need to know

The recent decision by the United States and Cuba to renew diplomatic relationships is a sign not only of changes in how the U.S. and Cuba operate, but an indication that more Cubans will be moving away from governmental jobs and into entrepreneurial roles.

Cuba has authorized 201 job categories, and their emerging private sector is expected to absorb the country’s informal employment activity as well as massive layoffs by state-owned entities. Many of these jobs, not surprisingly, are service-oriented and leverage the growing and successful tourism industry in Cuba.

But how does a Cuban entrepreneur get started?

Consider a paladar – a family owned and operated restaurant permitted by the government. Is building one and operating one a good investment? What capital requirements, supplies, labor, and other equipment are needed to get started and to be successful? Might other ventures be a better investment or better risk, given an entrepreneur’s goals, talents, and needs? In short, is a new entrepreneurial venture a good opportunity given the many rules and regulations on its operation?

For a country operating outside traditional business markets and business practices, the answers to these questions are not so obvious. In fact, operating in a regime that had stifled entrepreneurship for many years has removed examples of success and even placed limits on access to capital and goods.

As a professor at the Kellogg School of Management at Northwestern University, I recently examined these questions with my students as part of our Risk Lab, an experiential learning class. We looked at real-world problems of risk and exercise frameworks for the improved management and selection of risk. It is not about risk avoidance but rather about finding the right level or risk.

For the Cuban entrepreneur, risk is uniquely challenging. In addition to byzantine governmental regulations, the availability and price of various items are problematic. Cuba makes few things, so even basic items, must be imported. For instance, operating a hair salon (one of the permitted Cuban businesses) requires equipment like brushes and lotions not made on the island. Importation duties on many classes of items can be hefty. So deciding to borrow or to import critical goods are some of the decisions that Cuban entrepreneurs must consider when forming a business. We looked at the business decisions and return on investments of these newly permitted businesses in Cuba and found an immense need to connect Cuban entrepreneurs with international markets.

During this process, we collaborated with Tomas Bilbao, who is the executive director of the Cuba Study Group – a non-partisan group that works to increase the economic prosperity of Cubans.

The study findings highlight the importance of importation and access to capital (seed money, if you will) for many Cuban entrepreneurs. The study also led to U.S.-Cuba policy recommendations on eliminating Cuban family remittance limits, expanding banking services in Cuba, facilitating imports to Cuba, and prioritizing trade services such as cargo and express mail offerings that can connect Cuban entrepreneurs to U.S. markets.

Raising the importance of these changes is possible when looking at how Cuban entrepreneurs could prosper under such changes. In particular, these changes will allow Cuban entrepreneurs to access seed money from families in the U.S. and to buy basic and necessary goods for their businesses through importation from the U.S. These changes are fundamentally necessary for the growth of entrepreneurship in Cuba because of the nearly nonexistent supply of basic goods and access to capital.

This experiential learning garnered real-world solutions to the growth of the Cuban private sector. With the Cuban economy in great flux, the role of individual entrepreneurs has never been greater. Providing these entrepreneurs tools for success also provides pathways to prosperity that have not existed to date.

Russell Walker is a clinical associate professor at Kellogg School of Management at Northwestern University, the founder of the Risk Lab experiential course and the author of Winning with Risk Management and From Big Data to Big Profits: Success with Data and Analytics. Kyle Bell is a Kellogg MBA student.

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