Does institutional quality matter in attracting foreign direct investment? the case of Ethiopia based on ARDL approach.

This study investigates the role of institutional quality as a determinant of foreign direct investment (FDI) in the case of Ethiopia by applying the autoregressive distributed lag (ARDL) cointegration technique developed by Pesaran and Pesaran (1997). The results of the study demonstrate that institutional quality exerts a long run impact in determining the FDI inflows. The findings suggest that institutional quality is an important determinant of FDI in Ethiopia. The findings also suggest that the combined impact of institutional quality and trade openness is also significant by positively contributing to attracting FDI not only in the short run by in the long run as well. The findings support the policy implication that simultaneous implementation policies that reduce trade barriers and improve institutional quality play an important role in attracting FDI to a developing country like Ethiopia.