' ,lNT~.HATIONAL ~EVELOPUEIIT or

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I " r \ , \ ! \ '" , BANI{ FOR RECOJ:ISTRUCTIOH AED , ,,'> J or<'2: Economic Department CONFIDEiiTIAL Restricted to use ui thin the Bellk FOREIGH DIRECT IEVESTj :EFTS IN CUBA PREPARED BY; Jean Vi11echaise January 24, 1949 Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized

Transcript of ' ,lNT~.HATIONAL ~EVELOPUEIIT or

I

" r \ , \ !

\ '" , ~ ,lNT~.HATIONAL BANI{ FOR RECOJ:ISTRUCTIOH AED ~EVELOPUEIIT , ,,'> J ~.-~'.' ,-~,--

L-_--~

or<'2: Economic Department

CONFIDEiiTIAL

Restricted to use ui thin the Bellk -~,-----

FOREIGH DIRECT IEVESTj :EFTS IN CUBA

PREPARED BY; Jean Vi11echaise January 24, 1949

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CONTmITS

SUlll.1l1ary

I. Value and Character of Foreign Dire.ct InVeGtr;lents

II. Earnings, Income Remitted and Capital iIovements Relating to Foreign Investments in Cuba

III. Government Economic Policy and Regulations

Appendix

Right To Do Business

Labor Regulation

Taxation

Competition "li th Government-mmed Companies and Nationalization

Foreign Exchange Control

The value of foreign direct investments in Cuba can be estiL'l8.ted at some ~)700-750 million, out of '·1hieh U.S. invest­ments represented ~~596 million and British investments ~~lOO-110 million as of the end of 1947. Altogether foreigners control practically all the public utilities and railroads of Cuba, in which they have invested over $370 million, 55% of the sugar mills (as against 72% in 1939), the larGest banks and insurance companies and a large part of manuf~cturing and foreign trade enterprises.

Because of the severe effects of the 'Horld depression on Cuba, foreign enterprises established in Cuba hardly survived during th~ 'thirties and their profits Here 10'1." in compr.rison wi th those in other Latin ~imerican countries. The ",ar boom changed the situation and, durinG the 1944-47 period, earno­ings of U.S. enterprises increased to rouglily 10% of the capital invested, mostly on account of the large profits of the sugar mills. The yield of British cppital, 'Hhich is en.-­tirely invested in railroad companies, did not exceed 0.3% during the same period. The earnings of foreign enterprises have already declined in 194$ and should declj.ne som6Hhat further in the near future because of SInoller profits of the sugar industry.

Foreign investments in Cuba enjoy the same rights to do business and to acquire property as Cuban citizens and are subject to the same tax rates. There is no government com­petition uith private. enterprise and the Cuban GovermJ.ent has not nationalized any industries to date. lIo foreign exchange restrictions' of any kind exist in Cuba vrith the ex­ception of sual1 taxes on the trans.fer of funds abroad on capital account. But those favorable conditions, whiah are aJJnost unique in Latin lU:1erica, are dimmed by the uncertainty of the economic and political future of Cuba. Pl~esel1t union policy, in particular, is generally considered [rf businessmen, Cuban as well as foreign, as one of the main obstacles to the industrial development of the Island.

I, VALUE AND CHARACTER OF FOREIGN DIRECT TI:vESTHEHTS

The total value of foreign investm~~ts in Cuba has recently been estimated at roughly $700-750 million. 1:1 This SUlll 'Hould compare "lith over 02,000 million in 1930 and (~1,200 million in 1936. Y The (lrop in tIle value of investments is due primarily to the naturalization of for­mer Spanish subjects and to the sharp decline of U.S. interests in ths sugar industry.

Out of $700-750 mi~on, u.s. investments can be put at ~596 million as of the end of 1947. 2/ From the standpoint of U.S. direct investlnents abroad, Cuba is at the present time the third country in the "lorld (after Canada and Venezuela). Contrary to general belief, JUne:::'ican interests in Cuban public utility enterprises represent 0272 million as againct 0184 million invested in agricultural f;711terprises, ~5 million in manufac­turing and ~33 million in trade. ~ Noticeable during tile last 20 years has been tile decrease in value of U.S. sugar interests due to depression business losses from :;)600 million in 1928 to some $150 or 160 million in 191~3 and the increase in manufacturing interests, from ~:)27 million in 1936 to ~~65 million in 1943.

Spanish interests in Cuba have been consideraole 21 and are still predominant in the internal uholesale and retdl trade of the Island. Houever, they can hardly be considered as foreien investments at the present time, \-lith a fet-l exceptions. Spanish-milled enterprises used to remit only small Bll0untS to Spain and to re ... invest their profits in Cuba. They \<lere aenerally not administered from Spain but 'by Cpaniards defi­nitely established in Cuba although retaining their former nationality. Horeover mruv" Spaniard investors have becone naturalized Cubans and this trend has been accentuated since 1936.

--------------------------------------------------------Estimate by Ramiro Guerra.

InternDtional Lonctc.ry Fund IS TID-429, ttECOl1.01uic Survey of Cuba".

These figures are as of Hay ,:)1, 1943, date of the latest available breal~dmll1. .itt that date total U.S. direct investrilents in Cuba re­presented $529 as against $596 million in 1947, bu~'" the relative importance of each group indicated has probably not changed very much.

Estimated at ~~1.4 billion in 1933 (J .E. Alvarez Acevedo, La Colonia Espanola en l~Econ~~a Cubana).

2.

British interest have been put at some 0100 or 110 million, all il~ vested in raihlays Y '-lith the exception of a few tobacco factories. Canadian direct investments have been valued at ~12 million, being most­ly represented by barJcs and a fev! sugar mills. The ir,lportance of Canadian activities in Cuba is e.ctu.ally larger than this estil'nate Houlet sugCest because of the activity of Canadian banks.

Altogether foreigners control a 18.rge part of the Cuban economy: 55% of the sugar mills (as against 72% in 1939), the largest tobacco factories, practically all the public utilities BL~d railroads, the largest banks (holding tuo-th.irds of total deposits) and insurance COtl­

panies, a large part of manufacturing and foreign trade enterprises. Houever, the relative importance of foreigl"l invest;ments has been declin­ing over the last 15 years.

II. EABpnrps, mQill.~.Jl-l['.iITTED M:Q QAPITAL It,OiJEiZEETS RE'Lii.~ItQ.30 ,FOREICill nWEST11ElTTS IN CUBA

Foreign enterprises in Cuba have gone thrOUGh unusual vicissitudes. Follo\ung the "dance of the millions ll of the early 1920's, the collapse of the sugar market lIrecked the Cuban economy until the Har. Since 1940, general prosperity has caused a large increase in the earnings of many foreign-O\med enterprises.

In the 1938-40 period the aver~Ge yeild of U.S. investments in Cuba, as measuret;1 b-Y' the income remitted 1t, vIaS 2.61~ of the capital invested, the louest return of U.S. investments in Latin America, and there \ras no reinvestment of earnings. Because of the l·lar boom, earnings of American enterprises during the 191:4-46 period increased to a.1nlOst 10% of the capital invested ant \lere substantially hi[$he1' in 1947. But on the 11hole earnings of U.S. enterprises i...'1 Cuba have not been higher than for the averar.;e U.S. enterprise in Lntin il.meric2. 11 drop can be expected for 1948 on account of 10ller earnings of the suear mills. It is noticeable that during 1944 .. 46 aro'lUld 40% of the total earnings of U.S.-owned en­terprises in Cuba have been reinvested t as against less than 25% for the rest of U.S. investments in Lttin ~l.r.1erica during the same period.

Britiah investments did not yield any sizeable returns in the 19L~-46 period: approxim~tely 0200,000 a year, or 0.3% of the invested capital. This 10vI return is due to the railroad compe.nics, which, uhether U.S.- or British-O\med have been in a poor financial condition, Bri"Gish railuays have no"t. paid any dividend since 1926-27 and C100 bonds of the U.S.-ovmed Cuban Co. could be bought for $1 in pre-liar days. A certain

------~-.•. -.----.-------y pouth 14;~rican Journal, ,,~pril 5, 1947. This does not include in­

vestments represented by securities not quoted on the London stock EKchange or not represented at all by securities. iln undetermined araount of bonds of British-controlled raill.fays is held by Dutch citizens.

21 Branch earnings and cornrn.cm or preferred dividends only,

3. '

improvement in the financial situation of the railroads occt~red during the \-far. The foreign banks hardly survived the 1930-39 period during uhich the general moratoriutl froze most of their assets. They are nOvl in better condition but did not aotually participate in the general lJar boom beoause of the lack of investment outlets. Agricultural, manufao­turing and trade enterprises have been maldng large profits 01 though !1ampereci in their operations by grovring labor c:ifficul ~~es. The sugar mills have made large profits over the last fe\-1 years §! but their best years 6ee1,1 definitely over. The price of sugar is expected -(:;0 drop ddle production oosts uili remain high in 1949 sinoe the Cuban Governnent is maintaining by deoree \laGes and salaries at the 1947 level, T:i.lese troubles, added to politioal and eoonorl1io unoertainty, have been ohiefly responsible for a sizeable outfloll of capital on account, of foreign direct investments; it should be noted, hOHevor, that Cuban capitalists have sent abroad much higher sums, both absolutely and relatively.

III. GOv.L1U:lliEHT EC,Oj'TQUIC POLICY hID REGULATIOl:S 21 Right To Do Busine~s

There is no provision "lhetever in JGhe constitution or in the com­mercial code to prevent a foreigner from freely engaging in cor~erce or developing any industry vIi thin the country. On the contrary, the con­stitution guara11tees to foreigners all rights recognized therein and in the lavls including the civil lavIs.

~bor Regglation

The law for the nationalizat~on of labor provides that at least 50% of the payroll must be paid to native Cubans and at least one-half of the \-lace-earning and salaried personnel must be native Cubans. Vacan­cies ru1d positions created must be filled by native Cubans if qualified

-, The earnings, dividends and approximate stock price of some leading u.s. sugar producers in Cuba are as folious (in U.S. dollars):

Approx. Earns. Per.§h", 1948 1948-49 Price in 1947 ~ pivd, Price Range Jan.19fr9

Central Violets Sugar ~?7 .2:3 $3.81 ~~2.00 15 -10 ... 1/8 II Cuban-Amer. Sugar 6.13 4.27 2.00 17-1/8-12-3/8 14 Cuban Atl!U~tic S\1gar 10.68 8.35 2.00 24-3/4-lc..l/4 17 Francisco Sugar 8.06 5.76 1.50 16-3/8 ... 9-7/8 11 Punta Aleg;re Sugar 4.22 3.06 4.50 14 -8 8 Vertientes-Camaguey 5.28 4.25 2.50 15-1/2-12-1/4 12

This section is largely based on "Foreign Assets and Liabilities of the U.S.It, a report to the Senate Conunittee on Finance, December 18, 1947, G.P.O. 1948.

personnel is available. In the release of employees, aliens must be let out first. This law does not apply to establishments employing less than three persons. Foreign technicians In.ust be employed only Hhen it is shmm that a qualified Cuban is not available. Technicians permitted to enter Cuba usually can remain for no longer than one year and must train Cuban apprentices to replace them.

On the \-thole, Cuban la,., is very strict from the point of vievr of the employment of foreigners, and the labor unions constantly try to have still more rectrictive laus passed by Cong;ress. A preSidential decree iSfJued in 1947 and imposing sharp restrictions on '~he enploymel1t of foreign representatives by foreign corporations ~ dre\.J' an official protest from the U.S. Government to the Cuban Governr:lent. Present union policy is generally considered by businessmen, Cuban e,s Hell as foreigr.., as one of the main obste-cles to the industrial development of the Island. In 1947 and 1948 a fe\V' American-mmed pleu"'l.ts had to shut dOvID on aCCOUl1.t of labor difficulties.

Taxation

There is no r!:L~'i:;inction betvTeen foreigner:: cnd Cuban nc:tionals in matters concerni;,~'g 'taxation.

Since the Cuban Governr:lent does not Oim any companies, instances of competition of '~he Govermlent l.'ith private ellterpris~ are aJmost non-existent.

Cuba. has not nationalized any industries to d.ate. In a fel" in­stances, as a result of labor c1ifficul ties, the Gover:nuent has appointed a government intervener to exercise control of on industry or public utility until such time as the labor questions are resolved. Such cases are extl'emely rare, hOlTever, and usually concern public utili ties artd railroads in \1hic11 the interruption of services lloulq re8ult in ex­tensive injury to the general public. Houever, nationality of Ovlller­ship of' af'f'ected interests has had no aigllif'ica..'1.ce in past instances of' intervention.

lQ/ The decree, know~ in Cuba as the Cuban Agent Act, becruue effective December 25, 1947. It provided that any foreign business entity employing the services of distributors, agents or representatives for the distribution or sale of its products in Cube. may not dis­continue or revoke any arrangements uith such ind.ividuals Qr trans­fer agencies or distributorships e:!mept under certain stringent conditions. The United States' protest stressed that the decree i!ould bar or mal~e very difficult t,he replacer.lent of present selling representatives in Cuba by any foreign company either Hith another agent or its ovm branch office or sales staff,

Foreign Exchange Control

No foreign exchange restrictions of any kind erist in Ouba. There are no restrictions or formalities in connection with the transfer of f~l!lds abroad on capital account. However, a 2% tax is due on direct or indirect exportation of money or its equivalent including capital, cash and sectu'ities of any Idnd o In addition, there i~ a .15% mOllt~11y' tax on funds invested abroad (-\lith the exception of the ba1E1Uces left abroad by barnes). A tax of 7% is levied on interest and dividends paid to holders in Cuba of forei{sn securities ie.sued by public entities or private enterprises i-lhich do not operate in Cuba.,

APPEIIDIX I

Factors of ~ge in U .8. ntreet Inv~tlnents in Cuba

(in millions of United States dollars)

Capital.- ---Income Earnings Total Value-Year Remiti;ed Reinvested Movements of U.S .. Di-

to the in Ctlt) reot Invest-U.S .. A. Cuba menta ill Cuba Y

19.9 8.6 -12.2 526.2 27.5 23.0 -21.1 ;28 .. 1 30.4 21..9 - 2.1 547.9

1943 1944 1945 1946 1947 (est.) J/

3.3 .. 3 37.0

20.9 -11.0 557.8" 39.4 - 1.1 596.1

J/ .. means an OU'i, rIm-I of capital from Cuba into the U. S 3 on account of' U.S. dire(!t ii.J:;.~::l'tljlents.

21 As of the end ,,)J~ the year f

V The estimates- .)f income for 1947 are almost certair"J:.{ undervalued.

Source: U.S. Departr,lent of CorJll'llerOO - confidential data"

J1,PPEEDIX I~

Breakdmffi of Income Rami tted kl U.S. Dir,!.ct 111'U'estr1e~rt·s "In GUEft in 1946

H'a,nui'acturing Distribution Ag'I'icul ture

'in millions of U.S. dollars)

lIining Public utilities Hiscellaneous

Total .2lt..:1 Source: U. S .. Departnent of COl(llneree - confidential data.

Year

1913 1929 1946

APPENDIX III

Egtimama of' Ifrlt.ish. DiLe_ct lnve~nt.§ JJ:LQy.ba

(in thousands of pounds)

Direct Il1ves~6i1ents .,..-

Railways Other th~ Rail1.J£lV ___ Amount Interest Yield Amount Interest Yield . "._.--...-

25.,842 1,275 4 .. 9 8,.915 379 /"' ... 2 29,304 1,140 3.8 7,.711 139 1.8 261089 78 0.3 690 133 19.2

Sourc.e:. South American Journi!J., April 5, 1947.

APPEITDIX IV

I:.art~~.1 List pf U.S. Direct,)nvestments in~

(the name of the Cuban subsidiary is given uhen available)

~b1ic Uti1iti~s

~i1roads

The Cuban Company (controls Consolidated TI.ailraods of Cuba uhich controls "Cuba Northern Raihrays Coo; the Cuba R.R. Co.)

The Guantanamo and Uestern n.R. Compa.'1Y

Transportation ....

Havana Electric Railway Company Pan .'\m.erican Air'l;lays, Inc ..

CommunicatiQl!,€!

International. ~8lephone and Telegraph (Cuban Teleph0~~ Co~ - Radio Corpor8.tion (,f Cu'Ja - Cuban :'Jlloricon Telephone and '1:elzc;raph CO.. is at·med 5(:% 'CflJ International Telephone ella TeleG,.'aph and 50% by American TE.L.';;phone and Telegraph Company)

~c~ricity.

Atllerican ForeiGn and Pouer (Havana Electric and utilities CO;J -Campania Cubana de Electricidad)

Hal'tufacturing

Abbott Laboratories (Abbott Laboratories de Cuba) American .Agricultural Chemical Co. Dele Air Reduction Company Inc. (Cuban Air Products Corp .. ) Bristol ~wers Co. Colgate Palmolive Peet Co. (Crusellas y Cia) Columbian Carbon Co. Coca Cola Co. Cudahy Packing Co. General Cigar Co. Johnson t; J ohn80n Liquid Carbonic Corp. (Liquid Carbonic of Cuba - 50% of the stocks is

ot-med by llir Reduction Co G, Inc e )

Lone star Cement Corp. (Cuban Portland Cement Corp.) Parke Davis & Co. Pepsi Cola Co. (Campania Pepsi Cola de Cuba) Procter & Gamble Co. Sharp and Dohme Inc. Standard Brands Inc. Stokely Van Camp Inc. Swift & Co. Wilson & CO Q

-2-

APP&~DIX IV - Continued

Distribution

American Cyanamid Co. Armour &: Co., Ill. Canada Dry Ginger Ale Inc. Corn Produots Refining Co. E. I. duPont de Nemours & Co. Eastman Kodak Co. Firestone Tire & Rubber Co. (Firestone Interamerica Company) General Notors Corp. (General Hotors Interamerica Compal1Y) General Paint Corp. General Electric Company General Paint Corp9 Gillette Safety Razor Coo Goodyear Tire &: n.llbber Coo (Goodyear Tire and Rubber Co .. of Cuba) B. F. Goodrich (;;G::,lpania Goodrich Cub8J."'la) Ingersoll Rand C-);

International BU31ness 1.:achine8 Company Internatione.l I!8.'~resjGer Co. (International Hm-vester Coo of Cuba) Johns Uanville C0):>p. National Cash Register Co. Remington Rand Ince Sears, Roebuck & Co. Simmons COQ E. R. Squibb &: Sons Sterling Drug Inc. United Shoe l'lachinery Corp. United States Rubber Co. United States Steel Corp. F. H. Hoolworth Co.

American Sugar Refining Co. Central Violeta Sugar Co. Cuban American Sugar Co. Cuban Atlantic Sugar Co. Francisco Sugar Co. Guantanamo Sugar Co. Charles E. Hires Co. International H8rvester Co. Banati .subar Co. Pepsi-Cola Co. United Fruit Co. Vertientes Camaguey Sugar Co. '.Jest Indies Sugar Gorpo

Bethlehem Steel Corp.

Agricult~

Hining

- :3 -

Petroleum

Atlantic Refining Co. Sinclair Oil Corp. Standard Oil Co. (N.J.) Sun Oil Co. Texas Co.

M!§~neous

Atlantic Gulf & 't-Test Indies S.S. Coo Columbia Pictures Havana Docks Corp .. Johnson & Johnson Loew's Inc. Jilonogram Pictures Corp. Paramount Picture s Inc. Radio Keith Orpheum Corp. Twentieth Century Fox Films Corp. Harner Brothers Pictures Corp. Hestinghouse EleoJtric Corp. United Fruit Co. Universal Pictures Co. Inc.

Source: U.S. Depa~tment of CormuerQe - COllfidential

~PENDIX V

Partial List of Britisp ~!rect Investments in Cuba

Manufacturing

Henry Clay and Bock and Co. Ltd. (controls Havana Cigar and To 'baceo Factories Ltd.)

Railroads

United Raihlays of the Havana amI RegIa Warehouses Ltd. (mms Havana Terminal Railroad Co.)