Impact of institutional environment on foreign direct investment inflow to the manufacturing sector in Ethiopia

Abstract

The purpose of the research presented in the article is to study the impact of the institutional environment on the inflow of foreign direct investment (FDI) into the Ethiopian manufacturing sector. The study uses time series data from 1992 to 2021. using an autoregressive approach. The results show that the development of a right-wing society, along with political stability and a reduction in crime, are two factors of the institutional environment that have a positive and significant impact on the inflow of FDI into the manufacturing sector in the long term. However, the effectiveness of the government had a negative effect. In the short term, the rule of law, control over corruption and the quality of regulation have become factors in the institutional environment that have significantly influenced FDI inflows into the Ethiopian manufacturing sector. The study shows that an enabling institutional environment increases FDI inflows into Ethiopia’s manufacturing sector in both the long and short term. Therefore, it is extremely important for Ethiopia to improve the efficiency of public institutions and strengthen the domestic legal framework and legislation. This will help reduce political instability and promote greater accountability and transparency among government officials, thereby attracting more foreign direct investment from developed and developing countries. Moreover, due to its strategically preferred location in the Horn of Africa and the huge number of available and trained workforce, as well as the improvement of the institutional environment suitable for business, Ethiopia is very attractive as an investment destination.