7 Chapter II The underlying principles of the classification A. Purpose and nature of the classification 1. General considerations 22. In the study of economic phenomena, taking all elements into account simultaneously is not always possible. For the purposes of analysis, certain elements need to be chosen and grouped according to particular characteristics. Thus, all eco- nomic phenomena that are to be described in the form of statistics require systematic classification. Classifications are, so to speak, the system of languages used in commu- nication about, and statistical processing of, the phenomena concerned. They divide the universe of statistical data into categories that are as homogeneous as possible with respect to those characteristics that are the objects of the statistics in question. 23. ISIC is intended to be a standard classification of productive activities. Its main purpose is to provide a set of activity categories that can be utilized for the col- lection and presentation of statistics according to such activities. Therefore, ISIC aims to present this set of activity categories in such a way that entities can be classified according to the economic activity they carry out. Defining the categories of ISIC is as much as possible linked with the way the economic process is organized in units and the way in which this process is described in economic statistics. 24. ISIC provides categories for the classification of units based on the activi- ties carried out by these units, but it does not per se provide categories for specific types of units. This conceptual underpinning has been retained in the fourth revision for two reasons. First, naming actual units may be ambiguous if the same title or name is used differently across countries. For example, a “board of education” may have completely different functions and carry out completely different activities in different countries. Another example is the use of the term “Internet café”. In some cases, this term refers to a restaurant that provides (wired or wireless) Internet access to its cus- tomers as an amenity; in other cases it refers to a business service centre renting time on PCs along with Internet access and related activities; while in still other cases, it refers to a unit providing entertainment services by offering games that can be played over the Internet. Such terminology may change from country to country or region to region. Therefore, creating categories for “board of education” or “Internet café” might lead to the classification of units in the same class that should not be compared. Second, the name or title of a unit may not reflect the activity carried out by the unit. For example, a shipyard is usually engaged in the building of ships. However, the same infrastructure can be used for the dismantling of ships. If such a shipyard carries out mostly the dismantling of ships, it should not be combined in the same class with other units that build ships. Therefore, classifying a unit based on its characteristic as being a “shipyard” (e.g., based on existing capital equipment) would be ambiguous.
International Standard Industrial Classification of All Economic Activities (ISIC), Revision 4 8 Another example is gas stations that also operate convenience stores. A class “gas sta- tion with convenience store” would allow an easy classification of such units based on their appearance, but it would not reflect the actual activity carried out. In ISIC, such a unit would be classified according to its principal activity (see sect. III.C below), which could place it in “retail sale of automotive fuels” or “retail sale in non-specialized stores with food, beverages or tobacco predominating”. While both options may have mer- its, the consistent approach of classifying according to activities carried out has been followed in ISIC. Notwithstanding the above, in some cases a unit-type description has been employed, such as in new ISIC classes that exceed the previous scope of the classification. 25. In this context, it would be best if there were as many categories in ISIC as there are possible activities or if each production unit carried out only one activity, so that a unit could be unequivocally classified in a certain category. For practical rea- sons, however, ISIC can have only a limited number of categories. Carrying out only one activity may often be in conflict with the organization of activities and, as a result, with bookkeeping practices. In addition, for units undertaking several economic activities, some types of data, such as financial data, are often only available for the unit as a whole, which consequently is not homogeneous in respect of economic activ- ity. Another aspect of homogeneity is the distribution in geographical areas, which is particularly important for regional statistics. Although the geographical aspect has, in principle, little to do with the activity classification, it does affect the formation of statistical units. Therefore, the homogeneity of units relates to both activity and loca- tion. 26. The requirements for homogeneity and data availability are sometimes in conflict with each other because the smaller or more homogeneous the unit, the less likely that the required data are available. It is suggested (see sect. III.B below) that this problem be solved by using different units for different statistics, defined in such a way that each larger unit consists of a number of complete smaller units. As a result, comparisons can be made between the various statistics even when they use different units. 27. The detail required in the classification of data by kind of economic activity differs from country to country. Differences in the geographical and historical circum- stances and in the degrees of industrial development and organization of economic activities result in differences in the degree of elaboration with which various coun- tries find it necessary or feasible to classify their data according to kind of economic activity. National analysis often requires greater detail than is required or possible for international comparison purposes. Section IV below explains how ISIC can be used or adapted for national purposes. 2. Scope of the classification 28. ISIC is a classification according to kind of economic activity and therefore its scope has historically been restricted to the classification of units engaged in eco- nomic production as defined by SNA, which states: “Economic production is an activ- ity, carried out under the responsibility, control and management of an institutional unit, that uses inputs of labour, capital, and goods and services to produce outputs of goods and services”.11 29. The scope of the present version of ISIC is defined by the production bound- ary of the System of National Accounts, with one exception—activities in ISIC class 9820 (Undifferentiated services-producing activities of private households for own use). This type of activity, in combination with class 9810 (Undifferentiated goods- 11 SNA still refers only to goods and services and does not explicitly recognize the existence of products that fail to meet the strict definitions of goods or services in its classification. The revised CPC, however, now recognizes such products and includes a more detailed discussion of them. When we refer to products or economic production in ISIC, we use this expanded understanding of “goods and services”.
Introduction 9 producing activities of private households for own use), is used for measuring subsist- ence activities of households that can not otherwise be captured in the classification. These categories, however, cover only a subset of all households, because households with clearly identifiable economic activities (whether market or for own final use) are classified in other parts of ISIC. These two categories have been created for special pur- poses, such as labour-force surveys, to cover combinations of household activities that would otherwise be difficult or impossible to assign to a single ISIC category. These two categories are generally not used in business surveys. 3. Differences from other types of classifications 30. ISIC is a classification according to kind of productive activity, and not a classification of goods and services. The activity carried out by a unit is the type of pro- duction in which it engages. This is the characteristic of the unit according to which it will be grouped with other units to form industries. An industry is defined as the set of all production units engaged primarily in the same or similar kinds of productive activity. 31. ISIC is distinctively different in nature and purpose from the classifications of goods and services, ownership, institutional units or other types of classifications. 32. As it is in general not possible to establish a one‑to‑one correspondence between activities and products, ISIC is not designed to measure product data at any detailed level. For this purpose, a separate classification exists, namely, the Central Product Classification (CPC). Although each category in CPC is accompanied by a reference to the ISIC class in which the goods or services are mainly produced (crite- rion of industrial origin), this does not imply that all units producing these goods or services are classified here. By contrast, the classification of products is based on the intrinsic characteristics of the goods or the nature of the services rendered (see also sect. IV.C below), which results in a classification structure that is different from that used for ISIC. 33. Notwithstanding the above, it is often possible to use the classification of outputs in CPC as a tool for identifying the principal activity of a unit. The Companion Guide to ISIC and CPC will include a more detailed discussion of the link between ISIC and CPC.12 34. ISIC does not draw distinctions according to kind of ownership of a pro- ducing unit, type of legal organization or mode of operation because such criteria do not relate to the characteristics of the activity itself. Units engaged in the same kind of economic activity are classified in the same category of ISIC, irrespective of whether they are unincorporated enterprises, (part of) incorporated enterprises or government units, foreign controlled or have a parent enterprise that consists of more than one establishment. Therefore, a strict link between ISIC and the Clas- sification of Institutional Sectors in SNA does not exist. 35. Similarly, manufacturing units are classified according to the principal kind of economic activity in which they engage, whether the work is performed by power‑driven machinery or by hand, or whether it is done in a factory or in a household. The distinction between modern and traditional production methods is not a criterion for ISIC, although that distinction may be useful in some statis- tics. Special considerations are necessary in cases where a unit sells manufactured goods under its own name but has the actual production (fully on in part) out- sourced to other units. Guidelines for these cases are described in section III.C.5 below. 12 Companion Guide to ISIC and CPC, Statistical Papers, Series F, No. 101 (United Nations publication, forthcoming).
International Standard Industrial Classification of All Economic Activities (ISIC), Revision 4 10 36. In addition, ISIC does not distinguish between formal and informal or between legal and illegal production. Classifications according to kind of legal ownership, kind of organization or mode of operation may be constructed inde- pendently of the classification according to kind of economic activity. Cross‑clas- sification with ISIC can provide useful extra information. 37. In general, ISIC does not differentiate between market and non‑market activities. However, it should be emphasized that this distinction continues to be an important feature of SNA. A breakdown of economic activities according to this prin- ciple is useful wherever data on value added are collected for activities that take place on both a market and a non‑market basis. This criterion should then be cross‑classi- fied with the categories of ISIC. Non‑market services are most frequently provided by government organizations or non‑profit institutions serving households in the field of education, health, social work etc. B. Principles used in constructing the classification 38. The principles and criteria used to define and delineate classification cat- egories at any level depend on many factors, such as the potential use of the classifica- tion and the availability of data. These criteria will also change depending on the level of aggregation considered. In an activity classification, the criteria for detailed levels of the aggregation will inevitably consider similarities in the actual production process, while at more aggregated levels of the classification, this is largely irrelevant. 39. ISIC is built on a production-oriented or supply-based conceptual frame- work that groups producing units into detailed industries based on similarities in the economic activity, taking into account the inputs, the process and technology of pro- duction, the characteristics of the outputs and the use to which outputs are applied. The weights assigned to these types of criteria may vary from one category to another and between different levels of the classification. The criteria were intended to ensure that it will be practical most of the time to use the classes of ISIC for the industrial clas- sification of establishments, and that the units falling into each class will be as similar as is feasible in respect of the kind of activity in which they engage. 40. In general, the fourth revision of ISIC has tried to apply a more consistent approach, namely the use of the production process to define categories at the most detailed level. Thus, activities that share a common process in producing goods or services and use similar technologies are grouped together. As in many other cases, however, the strong need for continuity, i.e., comparability with previous versions of the classification, may override changes in the classification that could be made from the viewpoint of a consistent application of such a rule. 41. In addition, in a number of instances, such as food manufacturing, the production of machinery and equipment or the service industries, the various aspects of activities are so highly correlated that the need to assign weights to the criteria or restrict them to the technology of production only does not arise. 42. Since there is also a strong interest in relating activities and their outputs, the classes of ISIC are defined so that as far as possible the following two conditions are fulfilled: (a) The production of the category of goods and services that characterizes a given class accounts for the bulk of the output of the units classified to that class; (b) The class contains the units that produce most of the category of goods and services that characterize it.