THE BRILLIANT FUTURE OF A POST CASTRO CUBA'S ECONOMY: PRACTICAL ASPECTS (PART II)

MANUEL CEREIJO

JULY 2001

I. THE BUSINESS INCUBATOR

Introduction

The new business incubator is an innovative approach to economic development. It is one facet of a technology venturing process that should be an emerging Cuban response to changing economic conditions. Technology venturing is an entrepreneurial process by which institutions, univer-sities, government, and the private sector take and share risk in integrating and commercializing research, new technologies and business opportunities.

It will link public sector initiatives and private sector inv-estments to spur economic growth and technological diversification. The Cuban economy will be undergoing considerable upheaval and change. These changes will significantly alter the way new government officials, economic developers, and firms think about the way business operates.

Although they will be important, large corporations and older manufacturing concerns, as we see it, will not dominate the economic landscape of Cuba. Rather, entrepreneurship and small business development will have a significance increase as a factor in the economic reconstruction of Cuba. The result will be that Cuba will have an economy that will be innovation-based and dynamic.

Incubators can contribute to and benefit from a set of building blocks that make the technology venturing process- possible. These blocks include a healthy venture capital industry, a solid financial base, adequate public and private infrastructures, a sound educational system, and an extensive business network.

The basic concept behind the new business incubator, whether technology or non technology oriented, urban or rural, non-profit or profit, public or private, locally owned or part of a chain, will be to leverage entrepreneurial talent in Cuba.

The primary driver of technology-based new business venture will be neither the availability of funds nor the rate of technological advance; it will be the entrepreneur. New business incubators will maximize the potential of entrepreneurship talent within Cuba by providing the entrepre-neur with services and support that complements his natural talents and will enable him to expand his potential.

The incubator will be a significant link between the entrepreneur, especially when he is technology oriented, and the comm-ercialization of his product or service. This gap will have to be very short in Cuba if we want to expand and grow the economy at the pace of the modern countries.

B. Objectives and Characteristics

A business incubator has one major purpose, to nurture and develop fledgling firms into healthy small businesses. The focus in Cuba should be not as much in start-ups as it should be in helping ensure a business succeeds once begun. The period spent in the incubator will give entrepre-neurs the time to develop the needed management and business skills to survive on their own.

Although incubators in the United States are quite diverse, we must define some core characteristics for the ones to be established in Cuba. Incubators will rent physical space and will provide a set of logistical and management services to the tenants. Tenants will also be provided with access to some type of financial consulting and professional business services.

Entry policies will be set by the sponsoring organizations. However, usually these criteria include net job potentials, net profit, space requirements, environmental considerations, and economic diversification. Incubators should have also exit policies, typically a time limit set on a tenant's occupancy in the facility. After a period of time a tenant will no longer need the support services and should leave in order to make room for new start-up businesses. An exit policy will also prevent no growth or failing compa-nies from squandering incubator resources. .

Organizations who will sponsor incubators in Cuba can be quite diverse and they can include local governments, non-profit economic development agencies, educational institutions, and private companies. In Cuba, specially during the first few years of the reconstruction, it is recommended that incubators be mainly sponsored by the private sector, with the assistance of universities, and a minimum participation of local governments, only when it becomes absolutely necessary.

C. The Role of Incubators in the Economic Reconstruction of Cuba

The first few years of the economic reconstruction of Cuba will generate many people with talent and ideas for new businesses or services. The wave of entrepreneurship will be the result of 42 years of suppressed economic initiatives. Despite their desires, and their talents, many Cuban entrepreneurs will fail in their quest to build a successful surviving small business.

Statistically, in the United States, 80% of such businesses fail within five years. We can expect perhaps a greater rate in Cuba due to the incipient economic conditions and the lack of technological assistance and capital funds. The business incubator will play a significant role in improving the survival rates of business start-ups, as they do in the United States. In the United States, 85% of the small businesses which have been through the process of incubation succeed and become established, healthy firms, which are the largest beneficial contributors to the economy of the United States.

The business incubator in Cuba will promote enterprise success in several ways. First, the incubator will provide access to a pool of centralized services. Cost of these services will be part of a fee. Second, entrepreneurs with similar needs and frustrations will work in a close proximity that will enable them to share their experiences.

The presence of other firms and service providers will create a strong opportunity for trade relations to develop. The incubator will also help aid business'start-ups search for capital. An incubator run by a local govern-ment will predicate on creating employment opportunities for that local region. University-related incubators, while sharing that goal, also will look to transfer academic research into new products and technologies as well as to create opportunities for students.

For privately run incubators, the purpose will be slightly dif-ferent. They will expect an incubator to provide profit or investment opportunities, but they will also contribute to the betterment of the economy and the communi-ty.The private incubator will also be a vehicle for technology transfer to larger firms, to add property development, and a way to contribute to the community.

Private firms running incubators can vary from large manufacturing companies to venture investment groups. For example, in the United States, companies such as Control Data Corporation have 16 incubating centers across the country. Presently there are some 210 incubators operating in the United States. Possibly, and this is our recommendation, Cuba should have a maximum of 6 incubating centers operating in the long term pla-nning.

An incubator is not only an organization or a corporation, but a physical entity. Incubators in Cuba, due to the scarcity of appropriate space, will have to start functioning in single bui-ldings where the participating entrepreneurs will be housed and where, due to the physical proximity, they will spontaneously interact, which represents a definite advantage.

Another advantage will be if the incubator can be located near or on a University site. If so, they will have the following advantages: library facilities, exposure to certain state-of-the-art technology and think-ing, undergraduate students in science and engineering that form a very useful source of technical labor/assistance, a creative environment,etc.

Industrial parks are related to the incubator units and will be detailed later in the report. They act as lightning roads for technology -based companies and will be an area's lure for attracting companies.

D. Private Owned Incubators

Due to the special conditions in Cuba during the first few years after Castro, we propose that incubators, where private ownership be the principal one, be the ones to promote.

Private incubators should have a median size of 50,000 square feet. The average number of tenants, based on experience from the United States, and taking into consideration the condi-tions in Cuba, should be 20 tenants per center. This, of course, will depend on the availabilty of space, and the space needed by each tenant. As mentioned earlier, with a maximum of 6 centers, there will be an average of 120 new-to-be-companies in constant stage of formation.

The primary motive in funding the incubator by a private sec-tor is to make profit. In this sense, private sector incubator units can apply venture capital techniques. Therefore, capital gains should be emphasized over dividend income, and the incubator's parent corporation will distribute income to its investors on a variable basis.

The incubator will distribute income; it will provide access to further investment in successful incubator firms, and/or it will reinvest the proceeds of its investment in new companies. The incubator should be taxed as a corporation.

When the incubator's facilities are full, there is no room for future growth. The only investment available through the incubator unit then will be follow-on financings, financing of new firms that will replace the incubator's business failures, and successes that will move on to larger facili-ties.

The incubators will take a substantial position of the company's equity in return for the services offered. But, in this form,companies will have assured a portion of their needed post incubator financing.

E. Purposes/Benefits Summary

Incubators have become an innovative approach to help entrepreneurs in the United States in their start up phase with reduced overhead costs, expert assistance, and financial banking. We are sure that they will perform a very useful func-tion in the new Cuba's incipient economy.

People with raw energy and a productivity for risk taking built Cuba before Castro. We will have to rebuild it, in new ways, with new approaches. The entre-and-intrapreneurs will have to break tradition and provide dynamic sources of creative and innovative enterprises.

Mechanisms for providing seed capital as well as an expanding venture capital industry will help to build new ventures in Cuba. It is essential then for the entrepreneurial process to succeed to continue to support and expand the formation of capital and its innovative utilization in business development. Within the context of these major trends in economic dev-elopment, new business incubators will play a unique role in Cuba.

Incubators will help to create jobs by increasing the chances of success for emerging companies, especially in the high-tech areas. In other words, the new business incubator -capitalism in action- is an innovative mechanism for linking talent, technology, capital, and know-how.

We recommend the promotion of incubation centers in Cuba to speed its industrial development.

II. MANUFACTURING PARKS

Hand with hand with incubation centers and industrial development is the manufacturing connection: a manufacturing park. To assist in the economic reconstruction of Cuba, the government will have to promote the creation of manufacturing technology parks.

These parks will be composed of clusters of small, medium, and large manufacturing companies, located through out the country, and built by the private sector. A typical manufacturing Center should consist of approximately 300 acres (150 Hectareas). Some of the components of the parks must be: manufacturing companies, a hotel, a conference center, and amenities such as restaurants, lounges, meeting rooms, etc.

The facilities in the park are not mutually exclusive rather they should be interdependent, with a common focus of improving manufacturing companie-s'access to new and improved technologies. The parks will serve groups of heterogeneous manufacturing companies, depending on their geographic-al situation within the Island.

The type of information and assistance that these companies will need is likely to vary significantly, but will become hom-ogeneous and generic, as mentioned earlier, since the new technologies are computer based.

Wherever the computer is applied, increased structured, discipline, and standardization result, as we also noted before, for that industry. The Centers will provide an integrated approach to technology, with the result of a tremendous increase in productivity and efficient at all levels.

Some of the Centers should provide space for companies to display and market the newest innovations and products to attract visitors from the United States, Latin America, and the Caribbean.

It will be critical in each Center to have a commitment from a manufacturer who will be interested in purchasing 50 acres or more for development of a manufacturing plant. Some concessions regarding the selling price of land will be necessary at the early stages, to secure a commitment. The medium size or large manufacturer will be like a magnet attracting smaller companies to the Centers. These smaller com-panies will come from either the incubator centers or from their own formation.

The ideal situation will be that the smaller companies located in the park will act as suppliers of the larger ones. This way-, the large ones will operate under "zero inventory", reducing production costs and making their products more competitive in the international markets.

The smaller companies will have a large portion of their produ-ction secure by the needs of the larger companies, facilitating their expansion and growth. All of these new conc-epts will make Cuba's industrial products real competitive in the world market. They will be explained further in Section C of the report.

In summary, manufacturing parks or centers will be an important part of the economic reconstruction of Cuba. They will offer not only an opportunity to assist in the revitalization of the existing industries, but, will provide a stimulus for the industrial expansion and the development of new industries in Cuba. Industrial parks will constitute the core of "region-al development", a necessary concept to implement in Cuba and that will be discussed next.

III. REGIONAL ECONOMIC DEVELOPMENT

Our competitive advantage in Cuba will be our capacity to innovate. This is embodied in our history, traditions, and people. What the country will need is to rediscover how and why the innovative spirit worked for us so well in the pre-Castro era and in the exile community, and what changes will be required to keep it working in the future.

It will require the collective genius of business, labor, education, and government exercised in a setting that supports and encourages it. One of our objectives as a nation will be to make a top national priority the business of innovation, in both old and new firms, in universities, schools, and govern-ment institutions.

Our country will undergo a major transition from a socialist economy, natural resource economy, to one built on technology-based manufacturing, skilled human resources, and an in-credible variety of services-some labor intensive, some automated. The driving force for change will come from new technolo-gies. If properly done, we will achieve a major economic development.

The rising wave of technology will provide new tools to extend the life of old industries as well as to foster the beginning of new ones. The new Cuba will be characterized by a labor shortage, not measured in numbers of workers but in terms of skilled, qualified, educated, and productive work-ers. Retrain-ing and education will be at a premiun. There will be a new role emerging for institutions of higher education not only as partners in future economic growth but as leaders in a new generation of life.

After a period of dormancy, innovation will reassert itself as a vital force in old industries and new, in manufacturing and services, and in diverse province economies. The competi-tive challenge before us will be to lead in the process of renewal- in knowledge, in technology, in capital stock, and in manage-ment.

Regional development is where much of the action will be in Cuba. The inmediate objectives of public authorities should be (1) jobs for the residents of the region or province and (2) tax revenues from industry and commerce operating within the province.

Regional authorities everywhere will understand that "high-tech" industries represent growth opportunities. They will initiate many programs designed to attract such activities and expand those already located in the province.

Actions must be based on an understanding of how the system works. Every region will try to improve its attractiveness for business and for people. This translates into concern for taxes, services, transportation, education, and cultural institutions. We will have to look more carefully at features which are of particular relevance to technically based industry, assuming that all other economic and personal amenities will also be pursued.

One important element will be a "critical mass" - the grouping of facilities with interests in technical change. Accumulating this mass will take time. Much of the activity for a techni-cally based economic development will be associated with the universities in each region or province. The more and better the educational institutions, the greater the attraction for residents. Let me summarize several categories of benefits for a region based on a technical based economic development associated with universities in the region.

The role of universities in entrepreneurial activity will be very real and positive in Cuba. However, a province can not expect that the simple presence of a university will insure the blossoming of new high-technology companies. Entrepreneur-ial activity will be influenced considerably by the philosop-hy of the university, its administration, and the peer pressure of faculty.

The business climate in Cuba will be fierce both domestically and interna-tionally. The competition will be between countrie-s, provinces, and communities, as well as between large and small firms and among industrial sectors.

The ability to introduce new technologies or services to the market place poses several unique competitive problems everywhere and so will be in Cuba. There will be a gap between a firm and its potential markets. That is why the promotion of new industry growth should become an important facet of economic policy. Building indigeneous companies will become an essential element in regional economic development.

Indigeneous company growth will be a very beneficial and necessary long term economic development strategy for Cuba. It will harness local entrepreneurial talent. It will build companies which in turn will create jobs and add value to our communities.

It will keep home-grown talent within the community. Finally, it will encourage economic diversification and technological innovation by creating a climate that rewards productivity and innovation.

The entrepreneurial process, and the growth of indigeneous companies should be stimulated by each local authority in Cuba. Specially with mechanisms such as emphasizing quality education programs, tax incentives, establishment of develop-ment and industrial parks, etc. Local governments must provide facilities, resources, and expertise to promote new business activity in their cities.

Regional economic development will be at the forefront of technical enterprise in Cuba. Because it will involve the average citizen and the responsible political leaders, it will probably be the most effective activity for integrating the technical enterprise into Cuba's society.

Financial support for new firms, both venture capital and loans, will be the quintessential element of the free enterpr-ise in Cuba, yet, here also, regional activity will play a major role in the proper economic development.

One final comment may be appropriate on technically based regional economic development. Emphasis should be placed on the economic opportunities associated with technical advances. Since new products, processes, and services will result, there will be economic activity and employment.

Regional programs to facilitate the absorption of new tech-nologies and development of specialized support services will be perfectly valid tools for economic growth in Cuba.

IV. PUBLIC SECTOR PRODUCTIVITY

One crucial problem that we will face in Cuba is how to obtain productivity from the public sector. It is true that the productivity of government poses problems that are very difficult but not insuperable. This will be even worst in Cuba after so many years of a large bureaucratic system.

Many typical local government services in the United States should be handled by the private sector in Cuba and therefore remitted to the disciplines of profit. The result, wherever it has been tried, has almost resulted in a dramatic lowering of cost and a lifting of productivity.

Those public services that will remain public can gain from a plethora of new technologies and management techniques similar to those employed by business. Improvement in govern-ment productivity can equal or exceed that of industry when the principles of scientific management are applied effectively.

As in all services, productivity in government is largely a management problem. Cuba can not permit that in the diversity of their roles and enterprises, our local governments become giant conglomerates. Each part of the enterprise will survive only if its unit costs are low enough to allow profitable operation.

The larger the budget granted to local, provincial, or national governments in Cuba by the citizens, the greater it will be the consent expressed by them. Elected officials -at all levels- will find themselves many times deeply constrained by the governmental workers who will be not only a powerful voting bloc, but also sometimes will have monopoly power over necessary government services for which the officials will be responsible.

Public sector productivity is a relatively novel concern in the world, and should be adopted in Cuba. Traditionally, only the private sector produces. Public virtues like charisma, wisdom, and majestic could no more be tested for productivity than could the number of angels that might dance in the head of an idealistic elected official.

In Cuba, it will be of primary importance, probably the main one, that we elect honest people and not only to make policy decisions but also to run things, to be managers as well as leaders. Far more than private services, the new Cuban government must be made to be honest and must be made to become productive.

V. CREATIVE DESTRUCTION

In the development and reconstruction of the Cuban economy, there will be some crucial and definite conflicts. These conflicts won't be the split between liberals and conserva-tives, rich and poor, or technocrats and humanists.

All these divisions will be only a partial and distorted reflection of a deeper conflict: the struggle between past and future, between the existing configuration of industries and services and the industries and services that will need to be created. It will be a conflict between old established factories, technologies and the ventures that will replace them worthless.

Existing systems will be more expensive and less appropriate as the first few months of the new government passes and condi-tions change. Their reproduction will be a burden on growth, a diversion from always necessary investment in new technolo-gy.

Long term growth will only be achieved with the replacement of existing plants, equipment services and products with new and better ones. A successful economy for Cuba will depend on the proliferation of the rich, on creating a large class of risk-taking men who will be willing to shun the easy channels of a comfortable life in order to create new enterprises, earn huge profits, and, most important, invest them again. Only doing so, the country will be rapidly rebuilt.

VI. A NEW ATTITUDE TOWARD WORKERS

In Cuba, management and labor will have to team up on the same side by crafting goals in which both will have equal stakes. Improving Cuba's economy will be obtained through productivity growth. Expending energy on union-management battles will only weakens our strength against tougher international competi-tion.

In present days, the scientific management theories of Frederick W. Taylor, who more than a century ago introduced time study as a way to reduce manufacturing cost, are a bankrupt philosophy.

It is not the new technology that matters, it is how the technology is used. Work in Cuba should mean having a portfol-io of skills. Changing knowledge should become an increasingly vital job ingredient in the Cuban incipient economy.

Work under free enterprise depends, like investment, on "animal spirits", because the specifications of contract, is indeed an investment. We must develop in Cuba a management/la-bor system that works for national and international competi-tiveness. Management and labor must not have ill-conceived notions about each other. We must adopt new attitudes about the capability and intelligence of workers.

What will make Cuba a fast growing country will not be cheap labor, as was once the case, but highly skilled human resour-ces, and flexible, often automated, manufacturing capacity and long terms, perspectives. Cuba will have abundant labor supply but,at least for the short term, a shortage of skilled labor for many of the technologically demanding jobs of the new Cuba post Castro..

Jobs can be placed into four categories, depending on the availability of workers and the skill levels of those prospec-tive employees. For Cuba, in the short term after Castro, we will have for jobs a sufficient number of applicants but insufficient skill levels. Companies will have to use then technology to build a partnership between person and machine, augmenting the workers available.

When executives and managers make decisions about plant locations, level of automation and technology adoption, executives and managers in high technology countries such as the United States, Germany, and Japan, then it is thrown to the human resource people.

Such a failure could lead companies away from Cuba. We can not afford this situation to happen. There will be a need, in the long term planning, to find an optimal fit between the people and the technology.

In order to get the most out of the equipment, and to attract companies to Cuba, we will need people -workers- who have an understanding of it. Training, retraining and education will have to be a top priority!

VII. ECONOMIC FREEDOM

Economic freedom must be defended in the new Cuba, not only as a legitimate right enshrined in new laws and a new Constitu-tion, but on an equal footing with our political and personal freedoms, as the basis of the new system, one that has outperformed socialism in every part of the world.

We can never reach a point of complacency, or misunderstanding of our basis for freedom and prosperity, sometimes taken to be a political democracy. This is not the true basis. The true basis is private prosperity and political freedom.

Private property means the right to use the income generated by your property as you wish, subject to rules intended to minimize interference with the similar rights of others.

It means also the right to transfer the property to someone else at mutually agreeable terms. However, the time concept of economic freedom must be understood to be far richer than the mere absence of restraint, or the license to do as one pleases. Economic freedom must be coupled with a sense of moral responsibility, responsibility to one's community and Cuba, to the values that bind us, and, of course, to God.

The primary mission of a new government in Cuba should be not to erect barriers but to dismantle them, and thereby unleash human potential. Our personal and political freedoms will be inextricably linked with our economic freedoms.

The profits and personal wealth that some will gain in Cuba with sound investments will be the primary source of Cuba's technological innovations and jobs, but also of our new public forms of compassion for the poor.

And so we must repudiate in Cuba those who excoriate the rewards of capitalism, or prey on the passions of envy against the rich, or argue that wealth is somehow synonymous with theft. Wealth can be stolen, but only after it has been produced!

It is therefore an important part for the future economic reconstruction of Cuba to defend the human side of free enterprise, and that free enterprise is, in its correct application, an extension of our finest spiritual and ethical traditions.

VIII. TECHNOLOGY TRANSFER

The strength of Cuba and the well being of its citizens will be determined to a substantial degree by its technological development and its level of economic organization, as discussed earlier in the report.

The many changes in worldwide political structures have led to a vision of a new world order. These changes only serve to emphasize the invariance of the central fact that leadership in the acquisition of advanced technology and the maintenance of a strong technology base will be essential to the competi-tive position of Cuba.

In addition to the acquisition of technology, its transfer into new goods and services will be of central importance. Technol-ogy transfer will have occurred when a new idea, a new method, or a new process has been successfully incorporated into a product or service. Technology transfer, from the research to the industrial sector, will be of critical importance for the enhancement of economic competitiveness in Cuba. The engineer-ing community will have a significant responsibility in this area, and so will be the role of the universities and the scientific community.

The technology transfer of importance to Cuba will be the transfer of ideas, methods, and results from the science community in the United States to the Cuban engineering and industrial groups for the purpose of improving the technical operation and economic development of the Cuban industry.

Technology needs to be refined in order to be transfered. Turnkey technolo-gy will be the easiest to transfer. Technology transfer will need to be evaluated and, also, most important ideas must be expressed in the technical language and level of the needs for a proper Cuban industrial development and for the understanding and use of the engineering community. We must expedite as much as possible this process in Cuba.

However, there will always be a certain amount of time involved in learning a new technology and to adapt it to Cuba's specific needs. In most cases, the new technology will have to be refined or adapted to the specific environment of the industry in Cuba.

Speed to the market will be other critical factor that could hurt Cuba if technology transfer is not used efficiently and fast. Timeliness in capitalizing on business opportunities will be absolutely critical.

END

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