diff --git a/news/4208.bugfix b/news/4208.bugfix
new file mode 100644
index 00000000000..9325da32c7f
--- /dev/null
+++ b/news/4208.bugfix
@@ -0,0 +1,3 @@
+Fix a bug where `SETUPTOOLS_SHIM` got called incorrectly for relative path
+requirements by converting relative paths to absolute paths prior to calling
+the shim.
diff --git a/pip/req/req_install.py b/pip/req/req_install.py
index 0f935ffaf66..6c7fe4f7514 100644
--- a/pip/req/req_install.py
+++ b/pip/req/req_install.py
@@ -77,7 +77,10 @@ def __init__(self, req, comes_from, source_dir=None, editable=False,
         self.req = req
         self.comes_from = comes_from
         self.constraint = constraint
-        self.source_dir = source_dir
+        if source_dir is not None:
+            self.source_dir = os.path.normpath(os.path.abspath(source_dir))
+        else:
+            self.source_dir = None
         self.editable = editable
 
         self._wheel_cache = wheel_cache
@@ -388,7 +391,7 @@ def _correct_build_location(self):
         shutil.move(old_location, new_location)
         self._temp_build_dir = new_location
         self._ideal_build_dir = None
-        self.source_dir = new_location
+        self.source_dir = os.path.normpath(os.path.abspath(new_location))
         self._egg_info_path = None
 
     @property
diff --git a/tests/functional/test_install.py b/tests/functional/test_install.py
index 700db586d40..ab22617a4e6 100644
--- a/tests/functional/test_install.py
+++ b/tests/functional/test_install.py
@@ -271,6 +271,41 @@ def test_install_from_local_directory(script, data):
     assert egg_info_folder in result.files_created, str(result)
 
 
+def test_install_relative_directory(script, data):
+    """
+    Test installing a requirement using a relative path.
+    """
+    egg_info_file = (
+        script.site_packages / 'FSPkg-0.1.dev0-py%s.egg-info' % pyversion
+    )
+    egg_link_file = (
+        script.site_packages / 'FSPkg.egg-link'
+    )
+    package_folder = script.site_packages / 'fspkg'
+
+    # Compute relative install path to FSPkg from scratch path.
+    full_rel_path = data.packages.join('FSPkg') - script.scratch_path
+    embedded_rel_path = script.scratch_path.join(full_rel_path)
+
+    # For each relative path, install as either editable or not using either
+    # URLs with egg links or not.
+    for req_path in (full_rel_path,
+                     'file:' + full_rel_path + '#egg=FSPkg',
+                     embedded_rel_path):
+        # Regular install.
+        result = script.pip('install', req_path,
+                            cwd=script.scratch_path)
+        assert egg_info_file in result.files_created, str(result)
+        assert package_folder in result.files_created, str(result)
+        script.pip('uninstall', '-y', 'fspkg')
+
+        # Editable install.
+        result = script.pip('install', '-e' + req_path,
+                            cwd=script.scratch_path)
+        assert egg_link_file in result.files_created, str(result)
+        script.pip('uninstall', '-y', 'fspkg')
+
+
 def test_install_quiet(script, data):
     """
     Test that install -q is actually quiet.
diff --git a/tests/functional/test_install_reqs.py b/tests/functional/test_install_reqs.py
index f3b4cfbeede..9526a3ba456 100644
--- a/tests/functional/test_install_reqs.py
+++ b/tests/functional/test_install_reqs.py
@@ -3,7 +3,7 @@
 
 import pytest
 
-from tests.lib import (pyversion, path_to_url, requirements_file,
+from tests.lib import (pyversion, requirements_file,
                        _create_test_package_with_subdirectory)
 from tests.lib.local_repos import local_checkout
 
@@ -53,25 +53,43 @@ def test_schema_check_in_requirements_file(script):
 
 def test_relative_requirements_file(script, data):
     """
-    Test installing from a requirements file with a relative path with an
-    egg= definition..
+    Test installing from a requirements file with a relative path. For path
+    URLs, use an egg= definition.
 
     """
-    url = path_to_url(
-        os.path.join(data.root, "packages", "..", "packages", "FSPkg")
-    ) + '#egg=FSPkg'
-    script.scratch_path.join("file-egg-req.txt").write(textwrap.dedent("""\
-        %s
-        """ % url))
-    result = script.pip(
-        'install', '-vvv', '-r', script.scratch_path / 'file-egg-req.txt'
-    )
-    assert (
+    egg_info_file = (
         script.site_packages / 'FSPkg-0.1.dev0-py%s.egg-info' % pyversion
-    ) in result.files_created, str(result)
-    assert (script.site_packages / 'fspkg') in result.files_created, (
-        str(result.stdout)
     )
+    egg_link_file = (
+        script.site_packages / 'FSPkg.egg-link'
+    )
+    package_folder = script.site_packages / 'fspkg'
+
+    # Compute relative install path to FSPkg from scratch path.
+    full_rel_path = data.packages.join('FSPkg') - script.scratch_path
+    embedded_rel_path = script.scratch_path.join(full_rel_path)
+
+    # For each relative path, install as either editable or not using either
+    # URLs with egg links or not.
+    for req_path in (full_rel_path,
+                     'file:' + full_rel_path + '#egg=FSPkg',
+                     embedded_rel_path):
+        # Regular install.
+        with requirements_file(req_path + '\n',
+                               script.scratch_path) as reqs_file:
+            result = script.pip('install', '-vvv', '-r', reqs_file.name,
+                                cwd=script.scratch_path)
+            assert egg_info_file in result.files_created, str(result)
+            assert package_folder in result.files_created, str(result)
+            script.pip('uninstall', '-y', 'fspkg')
+
+        # Editable install.
+        with requirements_file('-e ' + req_path + '\n',
+                               script.scratch_path) as reqs_file:
+            result = script.pip('install', '-vvv', '-r', reqs_file.name,
+                                cwd=script.scratch_path)
+            assert egg_link_file in result.files_created, str(result)
+            script.pip('uninstall', '-y', 'fspkg')
 
 
 @pytest.mark.network