Organizational capital and the international co-movement of investment

A recent literature explores the macroeconomic implications of organizational capital (OC) and especially its ability to resolve discrepancies between existing models and data. This paper contributes to the OC literature by studying the effect of OC on international investment flows in the context of a two-country real business cycle model. The presence of OC introduces novel considerations into agents’ investment decisions since current investment and future productivity levels are positively linked. These new considerations help bring the model closer to the data. In response to a productivity shock in one country, investment increases in both countries, producing positive international co-movement in investment, a feature of the data that several IRBC models fail to produce.