Foreign Direct Investment (FDI) plays an important role as an engine of employment,rntechnological development, productivity enhancement, economic intensification, andrnmore importantly, as an instrument of technology transfer, specially from developed torndeveloping countries. The Government of Ethiopia having realized the inadequacy of therndomestic capital and low national saving, opened several economic sectors to foreignrninvestors. The government has also issued several investment incentives, including taxrnholidays, duty free import of capital goods and export tax exemption to encouragernforeign investment.rnThe very essence of this research is assessing the contributions of FDI to the developmentrnof SZO in terms of local employement creation, generation of revenue, transfer ofrntechnology, linkage with domestic firms in boosting local productivity.It assessed therneffectiveness of FDI in the development of SZO and at the same time challenges thatrnhinder the effectiveness of FDI were also identified.SZO is one of the investmentrnpotentioal zone found at the very vicinity of Addis Ababa.rnThis study employed mixed research method where both qualitative and quantitave datarnwere used in the assessment.Questionnaires and interview were the main instrumentsrnused to gather first hand information from experts, FDI owners and key officials of zonalrninvestment offices and regional investment Commission.The sampling methods used werernboth probability and non probability sampling. Purposive sampling was used to selectrnexperts with better knowledge and information from different sectoral offices. FDIrnowners were selected randomly from 53 FDIs operating in different sectors. The studyrnsample includes 60 experts from different offices, 18 FDI owners and two officials.Totalyrn80 respondents were involved in this study.rnThe result of this study indicated that the contribution of FDI to the development of SZOrnhas been constrained by various challenges of infrastructure, institutional buearucracy,rnand other organizational and human elements.Therefore it requires an effectivernmitigation of those challenges and impediments enhancing basic infrastructure provision,rntraining and developing skilled manpower,institutional reforms,enforcement ofrntechnology transfer and timely implementation of projects, regular environmentalrnauditing as well as a continous follow up or monitoring for effective implementation ofrnFDI projects to exploite all the benefits of FDI