Federated States of Micronesia: Investing

FDI in Figures

UNCTAD’s World Investment Report 2023 does not provide figures concerning FDI in Micronesia, which are almost non-existent 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 license 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 also offers good business potential. 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 years. Courts nominally support contractual agreements, but enforcement of judicial decisions has been historically weak. 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. The Federated States of Micronesia maintains a subsistence economy, particularly evident in smaller communities. However, in larger towns, the economy revolves around government employment and a modest commercial sector. The cash flow primarily stems from government salaries funded by the Compact of Free Association with the U.S.. Micronesia lacks a dedicated department for investment promotion and maintains minimal engagement with potential investors. Foreign investment is significantly constrained by stringent local ownership regulations, necessitating a majority stake (ranging from 51-60%, depending on the sector) and residency mandates exceeding five years. The weak financial sector further limits financing opportunities through bank loans. Legal constraints safeguard local small and medium-sized enterprises from foreign competition. Additionally, substantial political resistance is encountered by larger projects that compete with sectors already dominated by public figures. The archipelago ranks 74th out of 184 countries on the latest Index of Economic Freedom.

© eexpand, All Rights Reserved.
Latest Update: May 2024