It was formed from the previously separate colony of Italian Eritrea, which was enlarged with parts of the conquered Ethiopian Empire following the Second Italo-Ethiopian War.

The original Italian Eritrea, sometimes called Colonia primogenita (First Colony), was enlarged by 110,000 square kilometres (42,000 sq mi) with territories ("Tigrai") taken from northern Ethiopia that were populated mostly by ethnic Eritreans.

In the region of Asmara there were in 1940 more than 2,000 small and medium-sized industrial companies, concentrated in the areas of construction, mechanics, textiles, electricity, and food processing.

In early 1940 laws were established that enabled all the autochthonous Eritreans in the Italian military forces to receive a pension for their families; no other European colonial country granted this at that time.

In the summer of 1940, with Italy's entry into World War II, the Italians conquered the area of Kassala in British Sudan and annexed it.