In search of more satisfactory explanations for the recent surges in foreign direct investment
(FDI), an emerging literature has focused on the role of uncertainty and, in particular,
exchange rate volatility. Existing investigations have indicated mixed results regarding multinationals’
FDI reponse to changes in return uncertainty. This study constructs a stochastic
model of FDI by multinationals under cost uncertainty and highlights some of the fundamental
parameters of the FDI-uncertainty connection. The results provide some explanations for
the existing contradictory results in the literature. 0 1997 Elsevier Science B.V.
Keywords: Stochastic models; Risk; Foreign investment; Optimal designs