Federated States of Micronesia: Investing

FDI in Figures

According to the latest data available from UNCTAD World Investment Report 2022, the FDI stock amounted to USD 235.3 million in 2021. FDI was almost nonexistent due to prohibitions on foreign ownership of land and business, difficulties in registering companies, poor private sector contract enforcement, poor protection of minority investors' rights, weak courts, and weak bankruptcy settlement management. Nevertheless, the situation has improved since 2014, even though investment data for Micronesia is not too reliable. The fishing sector (which includes licence fees for the right to extract halieutic resources from the territorial waters of the country) attracts most of the investments. This sector has taken a major place in the Micronesian economy due to the recent construction of fish processing plants. The tourism sector offers good business potential, although the impact of the Covid-19 pandemic has been significant. The main investing countries remain the United States and Japan.

The usage of the U.S. dollar as the national currency protects investors against unexpected currency fluctuations. Moreover, its fiscal system is very attractive since it has relatively low corporate taxes. However, its geographical isolation, insufficient development of infrastructures as well as a shortage of airline connections constitute important hindrances to FDI. Foreign ownership of land is prohibited, property rights are only well protected for citizens and, to a lesser degree, for foreign nationals who have lived in the country for five continuous year. Courts nominally support contractual agreements, but enforcement of judicial decisions has been historically weak. The business climate has deteriorated, particularly in terms of business creation and loan availability. The COVID-19 pandemic puts Small island developing economies in dire straits. A small and narrow economic base, high degree of openness and significant dependence on few large developed countries make small island economies extremely vulnerable to global economic shocks. These economies are often at the receiving end of global crises, as they are highly dependent on external flows—trade, remittances and external capital and borrowing—compared to other groups of developing countries (United Nations, 2021). The collapse in tourist arrivals not only directly affects income and employment in airlines, ground transport and hotels, but also adversely affects the rest of the economy, including agriculture and construction. Falling tourism, and subsequently, reducing tax revenues, will exacerbate fiscal balances of many small island economies and also reduce the flow of foreign direct investment (FDI), as the tourism sector is typically the largest recipient of FDI.

Micronesia’s economic freedom score is 62.6, making its economy the 66th freest (from 82nd the previous year) in the 2023 Index of Economic Freedom (Heritage, 2023). Micronesia is ranked 11th among 39 countries in the Asia–Pacific region, and its overall score is above the regional and world averages. Micronesia has two preferential trade agreements in force. The simple average tariff rate is 5.1 percent, but nontariff barriers and poor trade infrastructure limit overall trade freedom. Micronesia is not a member of the World Trade Organization. Numerous impediments discourage foreign investment. High credit costs and scarce access to financing constrain the small private sector. Much of the population does not use formal banking (Heritage, 2023).

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Latest Update: September 2023