There is a danger that the advantage of environmental protection and enhancementrnachievable through the use of EIA will prove inadeq uate unless a high level of attentionrnis given to the application ofEIA by FDI projects. In the era of rapid industri ali zation andrnpopulation growth in the country, and increas ing recognition of the environmentalrnimpacts of certain development projects, the need to effecti ve ly apply EIA by FDIrnproj ects is apparent.rnThe objective of thi s study is to indicate the challenges for the e ffective implementationrnof EIA by FDI projects. This is crucial if performance is to be improved in order to helprnto protect the environment of the country.rnApart from reviewing the documentary literature, questionnaire, key informant interview,rnfocus group di scussion and perso nal observation were the main research instrumentsrnemployed in the study. About 26 interviews were conducted with relevant agents ofrngovernment institutions, foreign investors, consultants and local community members.rnMoreover, 6 EISRs were assessed based on relevant international and national standard s.rnWhenever possibl e, an attempt was made to overcome potential inaccuracies by crosscheckingrnparticipants' accounts with those of other participants in the EIA process andrnwith documentary evidence. Drafts of parts of earlier versio ns of much of the materials inrnthis paper were reviewed by some of those interviewed. Generally, the approach adoptedrnwas in close accord with the principles for conducting EIA evaluations enunciated byrnSadler (1998).rnPertaining to the results, lack of adequate legal foundation, lack of institutional capacityrnof EPA, weak inter-institutional coordi nation between EPA and li censing agencies andrnweak public participation were identified as major hindrances for the implementation ofrnEIA by FDI projects in Addis Ababa. To get out of these chall enges and further improvernthe implementation of EIA; strengthening the legal foundation of EIA, improving therninstitutional capacity of EPA and the institutional sy nergy between EPA and licensingrnagencies, and establi shing enforcement mechani sms necessary to ensure thernimplementation of genuine public participation are recommended.