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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 World Investment Report 2023, FDI flows accounted for USD 58 million in 2022, up from USD 33 million one year earlier. At the end of the period, the stock of FDI was estimated at USD 659 million. Traditionally, foreign investment in Palau is mostly directed towards the tourism and real estate sectors. The U.S., Singapore, and Japan are the main investment partners.

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 percentage 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 the 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 percentage 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 overlapping 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. The government employs roughly 30% of the workforce, making it the largest employer in the country. Tourism serves as Palau's primary economic engine, contributing an estimated 40% to GDP. Besides tourism, key commercial sectors encompass wholesale/retail trade, business services, local commercial fisheries, and construction. Subsistence activities involve fish, coconuts, breadfruit, bananas, and taro cultivation, albeit the agricultural sector is relatively small. Since gaining independence, Palau has operated under a Compact of Free Association (COFA) with the United States. The new COFA agreement, sanctioned by the U.S. on March 9, 2024, will provide a combined assistance package of USD 6.5 billion to the three North Pacific nations (Marshall Islands, Palau, and Micronesia) over the ensuing 20 years, commencing in FY24.

Foreign Direct Investment 202020212022
FDI Inward Flow (million USD) 423358
FDI Stock (million USD) 568600659

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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