Invasive non-native species can create especially problematic restoration barriers in subtropical and tropical dry forests. Native dry forests in Hawaii presently cover less than 10% of their original area. Many sites that historically supported dry forest are now completely dominated by non-native species, particularly grasses. Within a grass-dominated site in leeward Hawaii, we explored the mechanisms by which non-native Pennisetum setaceum, African fountain grass, limits seedlings of native species. We planted 1,800 seedlings of five native trees, three native shrubs, and two native vines into a factorial field experiment to examine the effects of grass removal (bulldozed vs. clipped plus herbicide vs. control), shade (60% shade vs. full sun), and water (supplemental vs. ambient) on seedling survival, growth, and physiology. Both grass removal and shade independently increased survival and growth, as well as soil moisture. Seedling survival and relative growth rate were also significantly dependent on soil moisture. These results suggest that altering soil moisture may be one of the primary mechanisms by which grasses limit native seedlings. Grass removal increased foliar nitrogen content of seedlings, which resulted in an increase in leaf-level photosynthesis and intrinsic water use efficiency. Thus in the absence of grasses, native species showed increased productivity and resource acquisition. We conclude that the combination of grass removal and shading may be an effective approach to the restoration of degraded tropical dry forests in Hawaii and other ecologically similar ecosystems.