- North American Industry Classification System (NAICS)
- Structure and Coding System of NAICS and NAICS Canada
- Historical Background
- The Conceptual Framework of NAICS
- The Development of NAICS
- Statistical Units
- Definitions of Statistical Units
- Reporting Arrangements
- Determining the Industry Classification of a Statistical Unit
- The Relationship of NAICS Canada and ISIC Revision 4Footnote 1
- Convergence Project
North American Industry Classification System (NAICS)
The North American Industry Classification System (NAICS) is an industry classification system developed by the statistical agencies of Canada, Mexico and the United States. Created against the background of the North American Free Trade Agreement, it is designed to provide common definitions of the industrial structure of the three countries and a common statistical framework to facilitate the analysis of the three economies. NAICS is based on supply-side or production-oriented principles, to ensure that industrial data, classified to NAICS, are suitable for the analysis of production-related issues such as industrial performance.
Economic statistics describe the behaviour and activities of economic transactors and of the transactions that take place among them. The economic transactors for which NAICS is designed are businesses and other organizations engaged in the production of goods and services. They include farms, incorporated and unincorporated business and government business enterprises. They also include government institutions and agencies engaged in the production of marketed and non-marketed services, as well as organizations such as professional associations and unions and charitable or non-profit organizations and the employees of households.
NAICS is a comprehensive system encompassing all economic activities. It has a hierarchical structure. At the highest level, it divides the economy into 20 sectors. At lower levels, it further distinguishes the different economic activities in which businesses are engaged.
NAICS is designed for the compilation of production statistics and, therefore, for the classification of data relating to establishments. It takes into account the specialization of activities generally found at the level of the producing units of businesses. The criteria used to group establishments into industries in NAICS are similarity of input structures, labour skills and production processes.
NAICS can also be used for classifying companies and enterprises. However, when NAICS is used in this way, the following caveat applies: NAICS has not been specially designed to take account of the wide range of vertically- or horizontally-integrated activities of large and complex, multi-establishment companies and enterprises. Hence, there will be a few large and complex companies and enterprises whose activities may be spread over the different sectors of NAICS, in such a way that classifying them to one sector will misrepresent the range of their activities. However, in general, a larger proportion of the activities of each complex company and enterprise is more likely to fall within the sector, subsector and industry group levels of the classification than within the industry levels. Hence, the higher levels of the classification are more suitable for the classification of companies and enterprises than are the lower levels. It should also be kept in mind that when businesses are composed of establishments belonging to different NAICS industries, their company- and enterprise-level data will show a different industrial distribution, when classified to NAICS, than will their establishment-level data, and the data will not be directly comparable.
While NAICS is designed for the classification of units engaged in market and non-market production, as defined by the System of National Accounts, it can also be used to classify own-account production, such as the unpaid work of households.
NAICS Canada has been designed for statistical purposes. Government departments and agencies and other users that use it for administrative, legislative and other non-statistical purposes are responsible for interpreting the classification for the purpose or purposes for which they use it.
Structure and Coding System of NAICS and NAICS Canada
NAICS is the agreed-upon common framework for the production of comparable industry statistics by the statistical agencies of the three countries, Canada, Mexico and the United States. Its hierarchical structure is composed of sectors (two-digit codes), subsectors (three-digit codes), industry groups (four-digit codes), and industries (five-digit codes).
NAICS agreements define the boundaries of the twenty sectors into which the classification divides the economies of the three countries. Although, typically, agreement has been reached that comparable data will be made available for Canada, Mexico and the United States up to the five-digit industry level of NAICS, Introduction NAICS 2007 differences in the organization of production in the economies of the three countries necessitated certain exceptions. For certain of the sectors, subsectors and industry groups, three-country agreement was reached only on their boundaries rather than on detailed industry structures.
NAICS agreements permit each country to create industries below the NAICS industry level to meet national needs. Canada and the US have established the same or comparable national industries where possible.
The numbering system that has been adopted is a six-digit code, of which the first five digits are used to describe the NAICS levels that will be used by the three countries to produce comparable data. The first two digits designate the sector, the third digit designates the subsector, the fourth digit designates the industry group and the fifth digit designates the industry. The sixth digit is used to designate national industries.
In general, the use of the same code across the three countries indicates that the class is comparable, even if the title is not identical because of differences in the use of language.
NAICS with Canadian detail is designated NAICS Canada. Mexico and the United States produce NAICS with their own six-digit detail, which publish as Sistema de Clasificación Industrial de América del Norte (SCIAN) México and the North American Industry Classification System (NAICS) United States.
Comparability among the three countries is indicated by superscript abbreviations at the end of industry titles in the classification structure and descriptions chapters of NAICS Canada 2007. A superscript "CAN" (CAN) indicates a Canadian industry, "MEX" (MEX) indicates that Canadian and Mexican industries are comparable, and "US" (US) indicates that Canadian and United States industries are comparable. When no superscript appears, the Canadian, Mexican and United States industries are comparable.
NAICS Canada 2007 consists of 20 sectors, 102 subsectors, 324 industry groups, 718 industries and 928 national industries, and replaces NAICS Canada 2002. Concordances showing the relationship between the changed sectors of these two versions of NAICS Canada are shown in the concordance tables chapter of this manual.
Over the years, Statistics Canada has developed and used a number of industrial classification systems. In 1948, the first Canadian Standard Industrial Classification (SIC) was developed. This was done to meet the government's need to establish a more comprehensive and fully-integrated system of economic reporting, in support of the key objectives of its post-war reconstruction programme outlined in the 1945 White Paper (on Employment and Income). The 1948 SIC brought together different industry descriptions in use at the time, each of which was applied to data about different aspects of the economy based on different definitions. It facilitated data comparability, by providing a framework of common concepts, terminology and groupings of industries. The introduction to the 1948 SIC manual stated that it was designed for the classification of the establishment but a precise definition was not provided.
In the major revision of the SIC in 1960, the importance of the need for a standard unit of observation was emphasized by the provision of a standard definition of the establishment. The variables needed to assemble the "basic industrial statistics" required for the analysis of the different sectors of the economy were specified and the establishment became the smallest unit capable of reporting that set of variables. The 1970 revision updated the industry groupings to reflect changes in the industrial structure of the economy.
The 1980 revision of the SIC was again a major one. This revision more directly linked the SIC to the System of National Accounts (SNA). It specified the universe of production to be as defined for the production accounts of the SNA. It drew a picture of all the variables that needed to be collected from or allocated to the establishment, in order to calculate value added by establishment for the Input Output accounts and Real Domestic Product by industry. It gave more emphasis to the role of "ancillary" activities in the collection of an integrated system of economic statistics and emphasized the difference between technical and ancillary activities and the role of ancillary units in accounting for total production. By using available statistics, it more explicitly used measures of specialization and coverage to delineate manufacturing industries.
It recommended the use of the 1980 SIC for the classification of establishments and the compilation of production statistics.
In 1980 a separate classification, the Canadian Standard Industrial Classification for Companies and Enterprises, was produced for the compilation of financial statistics related to companies and enterprises. This classification took account of vertically-integrated companies and enterprises and created special classes for them at the lowest level of the classification. The higher levels of the classification cut across the traditional groupings of industrial classifications based on separating primary, secondary and tertiary activities in the economy and created sector groupings that drew together single and vertically-integrated companies and enterprises engaged in the production of similar product groups.
It was customary to revise the SIC at ten-year intervals; however, by 1990 not all the economic statistics programs of Statistics Canada had implemented the 1980 SIC. It was decided to postpone the revision and to take into account the statistical needs of the Free Trade Agreement signed in January 1994. The needs were met by developing NAICS, an industrial classification common to Canada, Mexico and the United States. The first version, NAICS Canada 1997, was released in March 1998.
NAICS was revised for 2002 to achieve increased comparability among the three countries in selected areas and to identify additional industries for new and emerging activities. To that end, the construction sector was revised and comparability achieved, for the most part, at the NAICS industry (five-digit) level. Industries were created for Internet services providers and web search portals, and Internet publishing and broadcasting.
Changes to Canadian and world economies continue to impact on classification systems. NAICS has been revised for 2007 to reflect these changes. In particular, the Information and Cultural Industries sector has once again been updated. The updates take into account the rapid changes within this area, including the merging of activities. As a result, Internet publishing and broadcasting and web search portals have been combined, as have Internet service providers and data processing, hosting, and related services. Telecommunications resellers and other telecommunications have also been merged.
The Conceptual Framework of NAICS
NAICS is based on a production-oriented, or supply-based conceptual framework in that establishments are grouped into industries according to similarity in the production processes used to produce goods and services. A production-oriented industry classification system ensures that statistical agencies in the three countries can produce information on inputs and outputs, industrial performance, productivity, unit labour costs, employment, and other statistics that reflect structural changes occurring in the three economies.
The activity of an establishment can be described in terms of what is produced, namely the type of goods and services produced, or how they are produced, namely, the raw material and service inputs used and the process of production or skills and technology used.
To create industries, establishments can be grouped using the criterion of similarity of output or the criterion of similarity of inputs, processes, skills and technology used. The various versions of the Canadian SIC and of the International Standard Industrial Classification of All Economic Activities (ISIC) of the United Nations have all used mixed criteria to create the industries of the classification.
NAICS is based on a single production-oriented concept. Producing units are grouped into industries according to similarities in their production processes. The boundaries between industries demarcate, in principle, differences in production processes and production technologies. This means that, in the language of economics, producing units within an industry have similar production functions that differ from those of producing units in other industries.
It is possible to view the production process as consisting of two dimensions, industries and products. The unit of observation of the industrial classification for the production of industrial statistics is the producing unit or the establishment, and the industrial classification is primarily a grouping of producing units, not products. Groupings of producing units permit the collection of industrial statistics that bring together information about the inputs and outputs of establishments. Because establishments each produce a number of products, in different combinations, using different technologies, it is hardly possible to bring together and group all the establishments producing a particular product. It is more useful to use a production-oriented approach to bring together, into industries, establishments with common input structures, and to compile data on their product outputs. This permits the compilation of comprehensive data on the total output of each product by industry and across all industries. The needs of analysts to study market shares and the demand for products can more effectively be met by compiling data relating to the products produced by industries and using a product classification based on demand-oriented criteria to group products by markets served.
The Development of NAICS
NAICS was developed by Statistics Canada, Mexico's Instituto Nacional de Estadística, Geografía e Informática (INEGI) and the Economic Classification Policy Committee (ECPC) of the Office of Management and Budget (OMB).
The three countries agreed upon the conceptual framework of the new system and the principles upon which NAICS was to be developed.
- Time-series continuity would be maintained to the extent possible. However, changes in the economy and proposals from data users would be considered. In addition, in order to create a common system for all three countries, adjustments would be made where the United States, Canada and Mexico had incompatible definitions.
- In the interest of a wider range of international comparisons, the three countries would strive for greater compatibility with the International Standard Industrial Classification of All Economic Activities (ISIC Revision 3) by minimising the extent to which the lowest levels of NAICS crossed the boundaries of the 2-digit level of ISIC Revision 3.
To help with the development of NAICS, a user committee meeting was called in November 1994 and extensive consultation was undertaken in Canada with federal and provincial government departments and agencies, business and trade associations, economic analysts and the advisory committees of Statistics Canada.
A co-ordinating committee and subcommittees, which covered agriculture, mining and manufacturing, construction, distribution networks (retail and wholesale trade, transportation, communications and utilities), finance, insurance and real estate, business and personal services and health, social assistance and public administration, were responsible for developing the proposed structure of NAICS, in co-operation with representatives from INEGI and the statistical agencies of the US. Proposals from all three countries concerning individual industries were considered for acceptance, if the proposed industry was based on the production-oriented concept of the system. The structure of NAICS was developed in a series of three-country meetings and formally accepted by the senior representatives of the ECPC, INEGI and Statistics Canada.
The final structure of NAICS was accepted by the heads of Statistics Canada, INEGI and the Office of Management and Budget of the United States on December 10, 1996.
Businesses have an operating structure and also a legal structure. They define and register themselves in terms of legal units for the ownership of assets. The legal structure forms the legal base of the business. Businesses usually submit corporate tax returns to government revenue authorities for the units that comprise its legal structure. A business derives its autonomy from the common ownership and control of its resources regardless of the number of legal units under which it registers them.
Though in the case of most businesses the legal and operating structures of the business coincide, particularly when the business is comprised of a single legal and operating entity, this is not always the case. In addition, accounting practices differ from business to business and the entities for which economic and financial data are available may represent yet another view of the business. It therefore becomes necessary to delineate the statistical structure of businesses and to define statistical units or the unit of observation about which economic data will be compiled and classified. This is done by a process known as profiling. Businesses are consulted about their legal and operating structures and their accounting practices. A four-tier statistical structure is then delineated. The standardized model developed at Statistics Canada for business surveys consists of a four-level hierarchy of business units. The levels comprise the location, the establishment, the company and the enterprise.
Definitions of Statistical Units
At the lowest level of the operating structure of businesses are producing units, such as the mill, plant, factory, farm, mine, warehouse, store, airline terminal or movie theatre. The location, as a statistical unit, is defined as a producing unit at a single geographical location at which or from which economic activity is conducted and for which, at a minimum, employment data are available. Locations may also be referred to as cost centres or as revenue centres, based on the availability of accounting information about them.
The establishment is the level at which all accounting data required to measure production are available. The establishment, as a statistical unit, is defined as the most homogeneous unit of production for which the business maintains accounting records from which it is possible to assemble all the data elements required to compile the full structure of the gross value of production (total sales or shipments, and inventories), the cost of materials and services, and labour and capital used in production. Provided that the necessary accounts are available, the statistical structure replicates the operating structure of the business. In delineating the establishment, however, producing units may be grouped. An establishment comprises at least one location but it can also be composed of many. Establishments may also be referred to as profit centres.
There are a number of special cases for delineating establishments. In situations in which accounting records can provide all the data needed to identify a separate establishment for each distinct activity being undertaken from the same premises, particularly if they are activities belonging to different industries, two separate establishments may be delineated. An example would be the case of restaurants or shops in a hotel. In such cases, each activity is delineated as a separate establishment, provided that: no one industry description in the classification includes such combined activities; all the data required to define an establishment are available for each activity; and output and employment are significant for both activities. In the areas of construction, transportation and communication, activities tend to be dispersed. The individual sites, projects, fields, networks, lines or systems of such activities are not normally treated as establishments. The establishment is represented by those relatively permanent main or branch offices, terminals, or stations that are either (1) directly responsible for supervising such activities or (2) the base from which personnel operate to carry out these activities. Units producing goods for further processing by other establishments within the enterprise are treated as separate establishments, provided that they are a profit centre or a cost centre for which, at a minimum, transfer prices and the quantity of goods transferred for further processing can be reported by the business.
The company is the level at which operating profit can be measured. The company, as a statistical unit,is defined as the lowest level organizational unit for which income and expenditure accounts and balance sheets are maintained from which operating profit and the rate of return on capital can be derived. An enterprise may consist of one or more companies. Companies may also be referred to as investment centres.
The enterprise is an autonomous unit for which a complete set of financial statements is available.The enterprise, as a statistical unit, is defined as a business unit that directs and controls the allocation ofresources relating to its operations, and for which consolidated financial and balance sheet accounts are maintained. International transactions, an international investment position and a consolidated financial position for the unit can be derived from these consolidated accounts. The enterprise corresponds to an institutional unit engaged in economic activity as defined in the System of National Accounts 1993. The System of National Accounts defines an institutional unit as an economic entity that is capable, in its own right, of owning assets, incurring liabilities, and engaging in economic activities and in transactions with other entities. In the case of most small- and medium-sized businesses, the enterprise and the establishment are identical. Large and complex enterprises, however, consist of more than one establishment, which may belong to different NAICS industries.
Information required about a statistical unit, as defined above, may or may not be available from the unit itself. Particularly in the case of businesses with complex operating structures, reporting arrangements will have to be made with the business to collect the required data about the statistical unit or to attribute all production costs to the producing establishments. These arrangements will differ from one business to the next, depending upon their particular record keeping practices.
Determining the Industry Classification of a Statistical Unit
NAICS is principally a classification system for establishments and for the compilation of production statistics. An establishment is classified to an industry when its principal activity meets the definition for that industry. This is a straightforward determination for establishments engaged in a single activity, but where establishments are engaged in more than one activity, it is necessary to establish procedures for identifying its principal activity.
In cases where there is more than one activity, the determination of the largest share is based on value added (value of outputs minus cost of inputs). The activity with the largest value-added is identified as the establishment's principal activity, and the establishment is classified to the industry corresponding to that activity. In practice, because of measurement issues, it is often necessary to use other variables - such as revenue or employment - as proxies for value-added.
The assignment of the industry code is performed at the 6-digit level of the classification. For example, if the value added within an establishment consists of 40% from manufacturing dishwashers (NAICS 335223, Major Kitchen Appliance Manufacturing), 30% from manufacturing airspeed instruments (NAICS 334511, Navigational and Guidance Instruments Manufacturing), and 30% from assembling clocks (NAICS 334512, Measuring, Medical and Controlling Devices Manufacturing), it will be classified to NAICS 335223, Major Kitchen Appliance Manufacturing. Coding to the more aggregate levels of the classification follows automatically. This is referred to as "bottom-up" industry coding.
In most cases, when an establishment is engaged in more than one activity, the activities are treated independently. However, in some cases, the activities are treated in combination. There are two types of combined activities that are given special attention in NAICS. They are vertical integration and joint production (horizontal integration). These combined activities have an economic basis and occur in both goods-producing and services-producing sectors. In some cases, there are efficiencies to be gained from combining certain activities in the same establishment. Some of these combinations occur so commonly or frequently that their combination can be treated as a third activity in its own right and explicitly classified in a specific industry.
One approach to classifying these activities would be to use the primary activity rule, that is, whichever activity is largest. However, the fundamental principle of NAICS is that establishments that employ the same production process should be classified in the same industry. If the premise that the combined activities correspond to a distinct third activity is accepted, then using the primary activity rule would place establishments performing the same combination of activities in different industries, thereby violating the production principle of NAICS. A second reason for NAICS recognizing combined activities is to improve the stability of establishment classification, both over time and among the various parties that implement the classification. An establishment should remain classified in the same industry unless its production process changes; and different parties should code the same establishment or type of establishment in the same way. A consistent treatment of establishments with combined activities is more likely if they are classified to a single industry.
Vertical integration involves consecutive stages of fabrication or production processes in which the output of one step is the input of the next. In general, establishments will be classified based on the final process in a vertically-integrated production environment, unless specifically identified as classified in another industry. For example, paper may be produced either by establishments that first produce pulp and then consume that pulp to produce paper or by those establishments producing paper from purchased pulp. NAICS specifies that both of these types of paper-producing processes should be classified in NAICS 32212, Paper Mills rather than in NAICS 32211, Pulp Mills. In other cases, NAICS specifies that vertically-integrated establishments be classified in the industry representing the first stage of the manufacturing process. For example, steel mills that make steel and also perform other activities such as producing steel castings are classified in NAICS 33111, Iron and Steel Mills and Ferro-Alloy Manufacturing, the first stage of the manufacturing process.
The joint production of goods or services represents the second type of combined activities. In some cases, these combined activities have been assigned to a specific NAICS industry. Most of these activities involve either the sale and repair of goods or the sale and rental of goods in the same establishment. For example, establishments that both engage in the sale of new cars and also provide repair services are coded to NAICS 44111, New Car Dealers; establishments that both sell automobile parts and repair automobiles are classified in NAICS 44131, Automotive Parts and Accessories Stores; and establishments that both sell and rent musical instruments are classified in NAICS 45114, Musical Instrument and Supplies Stores. In other cases, specific industries have been identified for these combined activities, such as NAICS 44711, Gasoline Stations with Convenience Stores.
In some complex businesses, there are units that exclusively produce services in support of other units within the same company or enterprise. Examples of such units are transportation units, central administrative units and head offices. Such units are known as ancillary units and are classified according to the NAICS code related to their own activity. This means that a warehouse providing storage facilities for its own company or enterprise will be classified as a warehouse. Similarly, a head office providing headquarters services for its own company or enterprise will be classified to the head office industry.
Companies are classified to NAICS by using the principle of assigning them to the industry of the establishment or group of establishments that account for the largest proportion of the value-added of the company. Enterprises are classified by using the principle of assigning them to the industry of the company or group of companies that account for the largest proportion of the value-added of the enterprise. It has been pointed out above that NAICS is not specially designed for the classification of companies and enterprises, particularly those with establishments in different NAICS sectors. In general, the higher levels of NAICS better represent the activities of diversified companies and enterprises engaged in many activities.
The Relationship of NAICS Canada and ISIC Revision 4Footnote 1
Recognizing that economic statistics are substantially more useful if they are also internationally comparable, the Economic and Social Council of the United Nations (UN) adopted the original version of the International Standard Industrial Classification of All Economic Activities (ISIC) in 1948. Since then, ISIC has been revised in 1958, 1968, 1989, and, most recently, in 2006. This 2006 version of the classification is referred to as ISIC Revision 4. With these various revisions, the Council has recommended that member states adopt, as soon as possible, the latest version of the classification, with such modifications as necessary to meet national requirements, without disturbing the framework of the classification.
In accordance with these recommendations and mindful of the need to provide data classified to ISIC for purposes of international comparability, the statistical agencies of the three North American countries agreed that, in the original development of NAICS, they would strive to create industries that, at least, did not cross the two-digit boundaries of ISIC Revision 3. This minimal agreement was reached in the knowledge that a very detailed comparison would not be possible without considerably greater harmonization. The NAICS 2002 revisions were performed to meet those same objectives; and the NAICS 2007 revisions were also made using a similar approach - although in this case it was the ISIC Revision 4 that was providing the framework.
NAICS, like ISIC, was principally designed to provide a classification for grouping establishments based on the kind of activity in which they are primarily engaged. Whereas the main criteria employed in delineating the divisions, groups and classes of ISIC are: (a) the character of the goods and services produced; (b) the uses to which the goods and services are put; and (c) the inputs, the process and technology of production, it is the third criterion of ISIC that corresponds to the conceptual basis of NAICS. This makes it unique among industrial classifications in that it is based on a single criterion.
In addition to working to maintain coherence between NAICS and ISIC, international efforts have also focused on moving towards greater coherence between NAICS, ISIC and the Statistical Classification of Economic Activities in the European Community (NACE, Nomenclature statistique des activités économiques dans la Communauté européenne). In June 2000, a working group was assigned to study the potential for greater convergence between NACE and NAICS under an agreement signed by the heads of the statistical agencies of Canada, the European Union, and the United States. One output of the project was a convergence scenario, assuming a possible common top structure for NACE and NAICS, which was then discussed during an extensive consultation phase with stakeholders in the participating countries. The outcome of those consultations showed that, despite the benefits, there was insufficient support for the scenario. The overriding argument was that the number of necessary changes and associated implementation costs were too high. As a result, the new focus of the convergence work became a "better concordance" scenario, which addressed lower structure detail and concept issues. The suggested changes have resulted in classifications with much more comparable building blocks, allowing for data conversion at different levels of the classification while still maintaining different structures.
A comparison between the ISIC Revision 4 sections and NAICS 2007 sectors shows that of the 21 ISIC sections, 14 have good or better comparability, 3 have mixed comparability, and 4 have poor comparability or comparison is not possible. Because of the similarity between NACE and ISIC, comparability between NACE and NAICS was also significantly improved as the result of this project.
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