What is growth accounting?

Full Explanation

Growth accounting, pioneered by Robert Solow in 1957, breaks down output growth into its component drivers. At the macroeconomic level, it explains GDP growth through changes in labour hours, capital stock, and total factor productivity. At the firm level, the same framework decomposes revenue or GVA growth into the contributions from hiring (labour), investment (capital), and everything else (TFP). The 'everything else' is where intangible assets live — technology improvements, brand building, process optimisation, and knowledge accumulation. Modern growth accounting frameworks like EU KLEMS further decompose capital into tangible (machinery, buildings) and intangible (software, R&D, brand) components, making the contribution of intangible investment visible. Opagio applies this methodology at the individual company level, giving founders and investors quantitative evidence of how their intangible investments translate into growth. At the macroeconomic level, the growing importance of intangible investment is reshaping how economists and policymakers measure productivity. Traditional national accounting frameworks undercount intangible investment because much of it is expensed rather than capitalised. Research by Jonathan Haskel and Stian Westlake has documented how this measurement gap distorts our understanding of economic growth, investment, and inequality. For businesses, the practical implication is that standard financial statements systematically understate the true level of investment occurring in knowledge-intensive firms.

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