The result of this research is the size of tourism’s market in the neighboring countries is a major factor in attracting FDI in Zanzibar hotel industry. The problem of market size was also complimented by availability of diverse tourism assets. The study revealed several traditional location variables such as infrastructure, political stability, economic growth and openness to trade, do promote the flow of FDI to Zanzibar hotel industry. It was also found that hotel investors from developing countries relatively tend to perform activities with low-cost structures thereby minimizing the relevance of the perceived risk associated with the host country and operate in countries with dissimilar business practices in relation to the home country.