ABSTRACT Small island states generally refer to states with a geographic area of less than 1,000 square kilometers and a total population of less than one million. These characteristics can be seen to directly affect the role of foreign direct investment (FDI) within the states. Firstly, small island states may have a nan·ow economic base because of the limited range of resources. As such, it is common for small island states to develop abundant resources making the economy revolve around only a limited number of economic sectors such as tourism or financial services. Secondly and conversely they may instead develop strong economic dependence on a larger economy to gain markets as well as obtain investments. As a result of these characteristics, small island states may thus greatly depend on FDI to keep the economy afloat. Developing Small Island states experience great problems. They must often manage limited resources, depend on other states, manage vulnerabilities of economic sectors, and develop effective economic and socio-political infrastructures. Whilst there is a general recognition as to the importance of FDI to small island states, each small island state is differently endowed, and has different historical developments and systems so that to understand the relationship fully, there is a need to consider the significance of FDI based on the specific context of each particular small island state. This study therefore considers the imp01iance of FDI in the context of the Zanzibar a developing small island state near mainland Africa, to explore the role and impact of FDI on such states. This paper analyses the strength and vulnerabilities, how the Zanzibar obtain FDI, what effects does it have and its overall importance. The methodological framework follows the research onion model by Saunders, Lewis & Thornhill (2003). The research utilizes case study and the PESTLE analysis technique as the investigative strategy. The method of collecting data is desk or secondary research. This pertains to the concurrent processes of collecting, integrating, classifying, interpreting and analyzing data from secondary sources. The benefits and the adverse effects are analyzed in order to determine their effect and if such an effect will lead to economic growth and prosperity.