Despite officials' disinterest in realizing the essential role tourism may play in this regard, Ethiopia still needs extraordinary growth and development to meet the country's development needs. Because it is the center of international conferences and the entry point for the majority of international tourists, Addis Ababa can attract visitors. Despite the city's many attractions and tourism service providers, investment is insufficient to upgrade them. The major goal of this research is to examine the opportunities and challenges of institutional policy and regulation of tourism business development in Ethiopia by focusing on hotel licensing in Addis Ababa as a case study. The study is descriptive, with both quantitative and qualitative research methods applied. Interviews, questionnaires, focus group discussions, and available secondary sources were employed to collect data by the researcher. Participants were chosen from licensed star hotels and tour operators. Various governmental and non-governmental organizations in Addis Ababa were also interviewed. The study's findings reveal numerous obstacles and potential for tourism investment in Addis Ababa. Bureaucratic issues, a lack of basic infrastructure, a lack of promotion in the sector, macroeconomic uncertainty, and a problem with implementation capability are among the major hurdles. The potential for tourism and investment, according to this study, includes good government attention, a huge market size, a mixed market economy, adequate resources, and the availability of a trainable workforce. Public infrastructure, such as transportation, telecommunications, water supply, and energy, as well as tourist infrastructures, such as hotels, restaurants, tour operations, conference centers, and recreation facilities, are among the investment potential. In general, despite the city's abundance of tourism investment potential, investment performance was determined to be poor. The institutional framework of the government offices should be upgraded to address investment barriers in Addis Ababa, such as adequate taxation, rivalry from adjacent cities, low promotion, and a shortage of qualified people.