2023 Investment Climate Statements: Micronesia

Policies Towards Foreign Direct Investment

There are many structural impediments to increasing foreign investment in the FSM. The FSM has no department dedicated to promoting investment nor any ongoing dialogue with potential investors. These challenges, both regulatory and political, affect foreign investment and economic progress in general, and addressing them requires a constitutional and political will to change that is unlikely in the foreseeable future. Some political leaders at the state and national levels are owners of the largest businesses on the islands and strongly oppose the required structural changes that would result in increased competition. The FSM scores in the lowest quintile in almost all measures and international indices of economic activity and climate for doing business.

In theory, the country’s courts support contractual agreements, but enforcement of judicial decisions is weak. Foreign firms doing business in the FSM have difficulty collecting debts owed by FSM governments, companies, and individuals, even after obtaining favorable judgments. For these reasons, the World Bank’s 2020 Doing Business Report ranked the FSM very low in protecting minority investors (185th of 190 countries) and enforcing contracts (183rd of 190 countries). U.S. companies and individuals considering doing business with parties in the FSM should exercise due diligence and negotiate credit and payment arrangements that fully protect their interests.

Limits on Foreign Control and Right to Private Ownership and Establishment

All four of the FSM states have limits on foreign ownership of small- and medium-sized businesses. Large projects are assessed by the respective state governments on a case-by-case basis. Each state requires a separate application for foreign investment permits. Foreign investment is strictly limited by local ownership requirements (51-60 percent minimum, depending on sector) and residency requirements of more than five years. Financing through bank loans is limited due to a weak financial sector. Local small- and medium-sized businesses are protected from foreign competition through legal restrictions. Larger projects in competition with a business sector already owned by public figures face strong political opposition. Politicians enthusiastically receive large and unrealistic development proposals, but do not move forward primarily due to land issues and traditional landowner disputes. The FSM does not maintain an investment screening mechanism for inbound foreign investment.

Other Investment Policy Reviews

The government has not undergone any third-party investment policy reviews in the last five years.

Business Facilitation

FSM lacks a single window for online business registration or information portals providing comprehensive business registration information. The FSM Department of Resources and Development (R&D) maintains information on trade and investment on its website. However, all information is woefully out of date (trade and investment data has not been updated since 2013). Post understands obtaining licenses and permits in a timely manner may depend more on the relationship of the investor (or local legal counsel) with the official in charge, rather than any clear procedure or timeline. The World Bank’s 2020 Ease of Doing Business report ranked the FSM as 158th of 190 countries globally in terms of procedures to register a business (Note: The World Bank is currently gathering data for its Business Enabling Environment Report that will replace the Ease of Doing Business Report).

Outward Investment

The FSM government does not promote, incentivize, or restrict outward investment. Given the small population and lack of capital formation, outward investment is negligible. The U.S. Bureau of Economic Analysis has shown FSM investment in the United States as $1 million +/- for the last ten years.

Transparency of the Regulatory System

The FSM is not a signatory to any convention on transparency in international investment. Transparency of government actions is typically based more on personalities than on the law. Regulatory bodies sometimes involve themselves in issues beyond their jurisdiction. Conversely, other regulations are not uniformly enforced. It is often difficult to obtain public records, although some states and government organizations do require open meetings. While basic laws are accessible on the internet, text or summaries of proposed regulations are published before enactment but are not printed in an official journal or publication, and there is no appeal or administrative review process. In addition, government audits and statistical reports are not prepared promptly, and timely data are often unavailable (the most recent publications using three- or four-year-old data).

The websites that provide the most relevant economic data on FSM are:

• National Public Auditor www.fsmopa.fm 
• Department of Resources & Development www.fsmrd.fm 
• FSM Statistics www.fsmstatistics.fm 

International Regulatory Considerations

The FSM signed on to the Pacific Island Countries Trade Agreement (PICTA) in 2001 but did not ratify the agreement. PICTA is a free trade agreement on trade in goods among 14 members of the Pacific Islands Forum (excluding Australia and New Zealand). Eleven countries – Cook Islands, Fiji, Kiribati, Nauru, Niue, Papua New Guinea, Samoa, Solomon Islands, Tonga, Tuvalu, and Vanuatu — have ratified PICTA. The FSM is not a member of any regional economic block, nor is it a member of the WTO.

Legal System and Judicial Independence

The FSM follows the U.S. common law system and uses U.S. case law as precedent. There are no specialized courts except for Land Courts in Pohnpei and Kosrae. All four states have State Courts and State Supreme Courts. The judicial system remains independent of the executive branch, but is reported to be slow, weak, and lacking the ability to enforce judgments properly. Regulations or enforcement actions are appealable. Appeals may be adjudicated in either the State or National courts.

Laws and Regulations on Foreign Direct Investment

In September 2018, the Pohnpei State Legislature overrode the Governor’s veto of a bill on foreign investment regulations. The bill became state law over the objection of several local business leaders. The new law placed all decision-making power into the hands of one person, the national Registrar of Corporations.

FSM national and state governments use a “traffic light” system to regulate businesses, with red for prohibited, amber for restricted, and green for unrestricted. Industry classifications in this system vary from state to state. The individual states directly regulate all foreign investment, except in the areas of deep ocean fishing, banking, insurance, air travel, and international shipping, which are regulated at the federal level. Thus, a prospective investor who plans to operate in more than one state must obtain separate permits in each state, and often follow different regulations as well.

The following are the regulations pertaining to restrictions by sector in each of the states:

FSM National

Red: Arms manufacture, minting of currency, nuclear power, radioactive goods.
Amber: Increased scrutiny before approval for non-traditional banking services and insurance.
Green: Banking, fishing, air transport, international shipping.

Kosrae State

Red: manufacture of toxic or biohazard materials, gambling, casinos, fishing using sodium/cyanide or compressed air. (Note: There is also currently a ban on all business transactions on Sundays in the capital town. End Note.)
Amber: Real estate brokerage, non-ecology-based tourism, trade in reef fish, coral harvesting.
Green: Eco-tourism, export of local goods, professional services.

Pohnpei State

Red: None presently defined, determined by board from among amber candidates.
Amber: Everything not classified as green.
Green: Businesses with greater than 60 percent FSM ownership, initial capitalization of $250,000 or more, professional services with capitalization of $50,000 or more, and Special Investment Sector businesses with 51 percent FSM ownership in retail, trade, exploration, development, and extraction of land or marine based mineral resources or timber.

Chuuk State

Red: Determined by the Director, none codified in law.
Amber: Casinos, lotteries, and industries that pollute the environment, destroy local culture and tradition, or deplete natural resources.
Green: Eco-tourism, professional services, intra-state airline services, exports of local goods.
Yap State

Red: Manufacture of toxic materials, weapons, ammunition, commercial export of reef fish, activities injurious to the health and welfare of the citizens of Yap.
Amber: None at present.
Green: All others.

Competition and Anti-Trust Laws

There is no law or agency governing competition in the FSM nor does the government require environmental, social, or governance disclosure to help investors and consumers distinguish between high-and-low quality investments.

Expropriation and Compensation

The FSM Foreign Investment Act of 1997 guarantees no compulsory acquisition or expropriation of property of any foreign investment for which a Foreign Investment Permit is issued, except for violation of laws and regulations and in certain extraordinary circumstances. Those extraordinary circumstances include cases in which such action would be consistent with existing FSM eminent domain law, when such action is necessary to serve overriding national interests, or when either the FSM Congress or the FSM Secretary of Resources and Development has initiated expropriation. There has been no history of expropriation involving foreign investors or U.S. companies.

Dispute Settlement

ICSID Convention and New York Convention

Since 1993, the FSM has been a member of the International Convention on Settlement of Investment Disputes between States and Nationals of Other States (ICSID) but is not a party to the New York Convention of 1958 on the Recognition and Enforcement of Foreign Arbitral Awards. To date, there have been no ICSID cases.

Investor-State Dispute Settlement

The FSM is not a signatory to a treaty or investment agreement in which binding international arbitration of investment disputes is recognized. Disputes take years to resolve and still may not produce concrete results. Some cases have been on the docket, with little or no movement, for 30 years or more.

International Commercial Arbitration and Foreign Courts

There are no provisions under FSM Federal law for alternative dispute resolution. This is also true of the states, except for Kosrae, where an alternative dispute resolution system has taken the place of a small claims court. Judgments from foreign jurisdictions are not enforceable in FSM courts.

Bankruptcy Regulations

A bankruptcy law has been in existence since 2005, but was used only three times, generally to avoid taxes.

Investment Incentives

There are currently no government programs or incentives to attract foreign investment.

There is no government agency tasked with developing an industrial strategy; however, the FSM government has made recommendations for growth in several sectors, most notably tourism, fishing, and aquaculture, without substantive measures to realize those goals. The telecommunications sector was opened to meet World Bank conditions for broadband development. However, rivalries between the state-owned telecom operator and the state-owned infrastructure operator have held back the development of broadband infrastructure to meet the needs of both businesses and consumers. Yap, Chuuk, and Pohnpei are connected to international fiber optic cables, enabling broad band access to the main islands in those states. The East Micronesia Cable project is expected to provide broadband connectivity to Kosrae by 2026. Legacy telecom operator FSMTC has rolled out 4G service in Pohnpei and the main island of Weno in Chuuk. The largest state-owned enterprise, Vital Energy, the parent of FSM Petroleum Corporation (FSMPC), built its first solar power plant in Guam in 2013 as a pilot project and plans to expand its renewable energy capacity into FSM in the future. Vital plays a critical role in the country’s energy infrastructure and service delivery, including maintenance and operation of IPPs and various energy related assets across the country. Given its existing resources, staff and infrastructure footprint, maintenance and operation capacity, and clear legislative mandate to expand the company’s clean energy business, Vital has the potential to play a significant role in further transition of the FSM energy sector to renewable sources, improving performance and optimization of generation assets, and lowering power costs for the country.

Politicians have called for expansion of the tourism sector, but have created no tax, licensing, or leasing incentives to encourage investment. Although there is considerable potential for growth in the tourism sector, the remoteness of the FSM, land ownership prohibitions, business ownership restrictions, and the current lack of hotel and restaurant facilities and tourism services mean growth in the tourism sector is unlikely to meet local expectations. Data prior to the onset of the COVID-19 pandemic show that growth fell in the areas of scuba diving, boating, and fishing. The March 2020 FSM border closure brought the sector to a standstill. Since the August 2022 reopening of the national borders, tourism has begun to recover gradually.

The United Nations Educational, Scientific and Cultural Organization (UNESCO) adopted the significant archaeological site of Nan Madol as a World Heritage Site in 2016 and has been working toward designating other sites in Yap, Kosrae, and Chuuk. Other efforts, including those by the U.S. Embassy and National Geographic Society, are underway to highlight the considerable cultural heritage extant in the FSM.

The government currently does not offer incentives for green energy investments.

Foreign Trade Zones/Free Ports/Trade Facilitation

There are no Foreign Trade Zones, Free Trade Zones, Special Economic Zones, or Free Ports in the FSM.

Performance and Data Localization Requirements

The FSM government mandates local employment when qualified individuals are available. U.S. citizens may reside in and work in the FSM indefinitely. Citizens of other countries must apply for the appropriate permits. The Philippine government in 2017 imposed restrictions on the entry of new Filipino workers into the FSM under the Philippines Overseas Worker Program. Filipinos make up the vast majority of foreign workers in the FSM. Recognizing the severe shortage in skilled workers in the FSM, the outgoing government of President David W. Panuelo has been negotiating the lifting of restrictions on workers with the Filipino government. There are no defined performance requirements for investments.

Real Property

The most important impediments to foreign direct investment (FDI) are derived from land and contract issues. Foreign ownership of land is prohibited; most land is owned and passed on within the clan structure, leading to conflicting title claims, the need to negotiate leases with multiple parties, and the possibility of changes when the original senior lessor dies. Dual citizenship is illegal, so Micronesian citizens born in the United States are unable to inherit or own property unless they renounce their U.S. citizenship. There is no system for land title insurance in any of the country’s four states. The combination of these factors ranked the FSM at 187th out of 190 countries globally in the World Bank’s Ease of Doing Business report’s assessment of registering property.

Although foreign nationals, including corporations, cannot own real property, they can own buildings or other structures and lease the land beneath on a long-term basis.

Intellectual Property Rights

Intellectual property rights (IPR) in the FSM are nominally protected and the country is a member state of the World Intellectual Property Organization (WIPO). The country is not listed in the USTR Special 301 Report, nor is it listed in the Notorious Market Report. The Embassy has not received complaints from U.S. firms regarding IPR issues, and the only U.S. corporations currently operating in FSM are United Airlines and Matson Shipping. The only three U.S. chains present (Ace Hardware, True Value Hardware, and NAPA auto parts) are 100 percent locally owned franchises.

For additional information about national laws and points of contact at local IP offices, please see WIPO’s country profiles at http://www.wipo.int/directory/en/ .

Capital Markets and Portfolio Investment

There are no stock or commodities exchanges in the FSM.

Money and Banking System

The two commercial banks operating in the country, the Bank of Guam and the Bank of the FSM, can only make small, short-term unsecured loans because of the prohibition of using land or businesses as collateral, difficulties inherent in collecting debts, and the inability to identify collateral that can be attached and sold in the event of default. There are no credit reporting agencies. The Bank of the FSM is prohibited by its charter from investing in any securities not insured by the U.S. government, so the bulk of its holdings are in U.S. Treasury bonds. The Bank of Guam operates as a deposit collector and transactions facilitator in the FSM, with most of its loans made in Guam.

The Bank of the FSM is protected from takeover by a trigger from the Federal Deposit Insurance Corporation (FDIC) that will cancel its insurance status if foreign ownership exceeds 30 percent. Foreigners are not allowed to open accounts with the bank unless they provide proof of local residence and work permits and fulfill U.S. Treasury “know thy customer” requirements.

Money exchange companies such as Western Union operate within FSM and handle the majority of remittances.

Since most businesses are family owned, there are no shares that can be acquired for mergers, acquisitions, or hostile takeovers. The FSM enacted a secured transaction law in 2005 and established a filing office in October 2006 primarily to serve the foreign corporate registration market.

Foreign Exchange and Remittances

Foreign Exchange

The currency of the FSM remains the U.S. dollar. The only two commercial banks operating in the country at present are the Bank of Guam and the Bank of the FSM, both FDIC insured.

Remittance Policies

There are no specific restrictions on repatriating profits from a business, except in the state of Chuuk, where an amount greater than $50,000 requires state approval.

Statistics on family-level and personal remittances are difficult to obtain, with various World Bank studies reporting figures ranging from $3 million to $14 million per year entering the FSM. However, remittances travel into and out of the country with Micronesians working abroad and in the United States sending money to their families in the FSM, while Filipino professionals and laborers working in FSM send money to their families in the Philippines. The World Bank does not, however, provide monetary estimates of remittance flows.

Sovereign Wealth Funds

The FSM has no sovereign wealth fund, but the government established a national trust fund modeled on the Compact Trust Fund to provide additional government income after 2023. That fund is managed by a U.S.-based commercial fund manager.

Privatization Program

There is currently no privatization program in the FSM.

Additional Resources

Department of State

• Country Reports on Human Rights Practices;
• Trafficking in Persons Report;
• Guidance on Implementing the “UN Guiding Principles” for Transactions Linked to Foreign Government End-Users for Products or Services with Surveillance Capabilities;
• U.S. National Contact Point for the OECD Guidelines for Multinational Enterprises; and;
• Xinjiang Supply Chain Business Advisory 

Department of the Treasury

• OFAC Recent Actions

Department of Labor

• Findings on the Worst Forms of Child Labor Report;
• List of Goods Produced by Child Labor or Forced Labor;
• Sweat & Toil: Child Labor, Forced Labor, and Human Trafficking Around the World and;
• Comply Chain.

Climate Issues

The International Monetary Fund in September 2019 authored a Climate Change Policy Assessment (CCPA) that takes stock of the Federated States of Micronesia (FSM)’s climate response plans, from the perspective of their macroeconomic and fiscal implications. The CCPA explores the possible impact of climate change and natural disasters and the cost of FSM’s planned response. It suggests macroeconomically relevant reforms that could strengthen the national strategy and identifies policy gaps and resource needs. FSM has made progress toward its Nationally Determined Contribution mitigation pledge by beginning to expand renewable power generation and improve its efficiency.

Sea level rise is the climate issue that most affects the FSM, particularly among its outer island atolls. More frequent and persistent salt water flooding is wreaking havoc on traditional crops. Food insecurity and lack of economic opportunities are leading to extensive out-migration to larger islands and to the United States.

The FSM developed Energy Master Plans ( FSM Energy Master Plans (2018) ) for each of the states to support efforts to increase renewable energy and increase access to affordable power. The Asian Development Bank provided a grant to the FSM for its Renewable Energy Development Project. The project is financing investment in renewable energy generation facilities in the FSM states of Kosrae and Yap, bolstering energy security and to reduce the reliance on fossil fuels for power generation in those states. Project investments include (i) solar photovoltaic capacity and mini grid and solar home system investments for Kosrae Utilities Authority (KUA) in Kosrae and (ii) the installation and integration of photovoltaic capacity and a battery energy storage system (BESS) for Yap State Public Service Corporation (YSPSC) in Yap. The project also supports institutional strengthening and capacity building in KUA and YSPSC, as well as for Pohnpei Utilities Corporation (PUC) in the FSM state of Pohnpei.

One of the key problems with integrating additional renewable energy has been antiquated power grids in each of the four states. For example, Pohnpei Utility Corporation has only been able to integrate one-third of the installed capacity of solar power due the instability of its antiquated grid. USTD is proposing technical assistance to increase renewable energy integration and provide grid modernization and capacity building assistance to the four state utilities in the FSM, including the Chuuk Public Utility Corporation, Kosrae Utilities Authority, Pohnpei Utilities Corporation, and the Yap State Public Service Corporation.

USTDA is proposing a grant to state-owned FSM Petroleum Corporation (“Vital”) that would fund technical assistance to support the development of a detailed business plan and implementation roadmap for Vital’s expansion into renewable power generation, battery storage systems, mini-grid deployment, and related services.  With the passage of the Transformation Act by the FSM Congress in 2023, Vital has been directed to further diversify and expand its clean energy business pursuant to FSM’s climate goals.  As the country’s state-owned petroleum products company and exclusive fuel supplier to FSM’s four utility companies, Vital plays a critical role in the country’s energy infrastructure and service delivery, including maintenance and operation of IPPs and various energy related assets across the country.  Given its existing resources, staff and infrastructure footprint, maintenance and operation capacity, and clear legislative mandate to expand the company’s clean energy business, Vital has the potential to play a significant role in further transition of the FSM energy sector to renewable sources, improving performance and optimization of generation assets, and lowering power costs for the country.

Because there are no private sector participants in the FSM energy industry (and because the country is tine), there are no regulatory incentives or deterrents (carbon credits, carbon taxes, tax credits, ESG of impact investing support, pollution standards, biodiversity offsets, eco-labelling, tradable permits, or other government policies (creation of protected areas, use of nature-based solutions, sustainable forest management, and other ecosystem management plans)) to achieve policy outcomes that preserve biodiversity, clean air, or other desirable ecological and climate benefits.

Deforestation is not an issue in the FSM.

Pollution abatement is not an issue in the FSM. The government is focused on climate resilience through the implementation of better emergency disaster response capabilities (e.g., better roads, small island runways, and port improvements).

Resources to Report Corruption

The FSM has no government agency specifically assigned with responsibility for combatting corruption. State prosecutors are the usual avenue for prosecuting corruption, with several cases brought to trial in the last few years, especially in Pohnpei State. The Public Auditor highlighted irregularities but relies on government prosecutors for enforcement capability. The Department of Justice in prior years prosecuted cases, but activity in this area recently has been varied; Pohnpei State and Yap State have been more active.

The principal contact for these types of cases is:

Leonito “Jun” Bacalando, Jr.
Acting Attorney General,
FSM Department of Justice
Palikir, Pohnpei
+691-320-2608 Leonito Bacalando Jr

There are no non-governmental “watchdog” organizations in the FSM that monitor corruption.