State-building establishes state-nation(s) [the state that makes diversity and democracy possible] as opposed to nation-building [which urges to create one nation (nation-state) without due consideration of diversity]. Through the institutional, policy and politico-psychological innovations, state-building is geared to accommodate diversity and ensure democratic good governance. In this regard, federal governance has the potential to do so as it combines elements of shared-rule and regional self-rule. Since 1991, Ethiopia has been in the track of state-building project experimenting identity-based federal model on one hand and lavishly adding (un) responsive strategies. This paper argues responsive state-building strategies consolidate federal democracy; foster culture of accommodating and managing diversity; strengthens federal decentralization and resolves conflict in Ethiopia. To the contrary, the paper challenges any unresponsive state-building approach that emanate from government’s ideology, policy, practice on one hand and unconstitutional ways of peoples’ reaction to the state.