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Foreign Direct Investment

Historically, Palau has not been able to attract a significant volume of foreign investment. According to UNCTAD's 2021 World Investment Report, FDI flows accounted for USD 24 million in 2020, up slightly when compared to 2019 (estimated at USD 22 million), despite the economic and health crisis triggered by the Covid-19 pandemic. The stock of FDI grew to USD 488 million in 2020. Traditionally, foreign investment in Palau is mostly directed towards the tourism and real estate sectors. The US, Singapore and Japan are the main investment partners.

The net inflow of foreign direct investment in Palau was reported at 9.3% of GDP in 2020, according to the World Bank collection of development indicators, compiled from officially recognized sources in March 2022.

Since 2011, the Government has started a revision of the FDI regime in order to make the country more attractive to investors. However, the Foreign Investment Regulations reserves some businesses to Palauan citizens, including wholesale or retail sale of goods, all land and water transportation, travel and tour agencies, and commercial fishing. Other sectors are semi-restricted, requiring a Palauan partner, though no fixed percent of ownership is required. The Foreign Investment Board must approve all foreign direct investment. In addition to the sector in which the investment will flow, the Board requires a statement of level of investment (in U.S. dollar amounts), the length of time the investment will be in Palau, the nationality of the investors, and the percent ownership of each investor. Foreigners cannot own land in Palau, but they can lease land and own buildings on leased land. Establishing secure land title may be complicated due to the complexity of the traditional land ownership system and occasional over-lapping claims. Other barriers to the development of foreign investment in the country are the low level of transparency in its procedures, the slow progress in resolving conflicts, the prerequisite of hiring only Palauan citizens and an annual fee for foreigners to obtain a work permit. In the last 2020 Doing Business report, issued by the World Bank, Palau ranked 145th out of 190 countries, 12 places down compared to the previous year. 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.

 
 
Foreign Direct Investment 201820192020
FDI Inward Flow (million USD) 222224
FDI Stock (million USD) 442464488

Source: UNCTAD - Latest available data.

Note: * Greenfield Investments are a form of Foreign Direct Investment where a parent company starts a new venture in a foreign country by constructing new operational facilities from the ground up.

Country Comparison For the Protection of Investors Palau East Asia & Pacific United States Germany
Index of Shareholders’ Power*** 7.0 6.7 9.0 5.0

Source: Doing Business - Latest available data.

Note: *The Greater the Index, the More Transparent the Conditions of Transactions. **The Greater the Index, the More the Manager is Personally Responsible. *** The Greater the Index, the Easier it Will Be For Shareholders to Take Legal Action.

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