The results also highlight some of the possibilities in more general settings. For
instance, the case indicating a positive correlation between FDI and uncertainty is,
in fact, consistent with the rather well-established result in the literature that indicates
a negative correlation between commodity trade activity and exchange rate volatility.
6 The explanation is that in the face of a rise in return uncertainty, a diversification
measure on part of risk-reducing exporters is to channel some of their production
by moving some capacity to their export target countries. This production channeling
replaces some commodity exports and, hence, reduces the volume of commodity
trade while raising the volume of FDI. Note that, consistent with the result in
Eq. (8), taking such a diversification measure is more pronounced for multinationals
with a higher degree of risk aversion and a relatively smaller prior capacity held
abroad.