Introduction 23 (c) Treatment of horizontal integration 120. Horizontal integration occurs when an activity results in end-products with different characteristics. This could theoretically be interpreted as activities car- ried out simultaneously using the same factors of production, in which case it would often be impossible to separate such activities statistically into different processes, assign them to different units or generally provide separate data for them, nor would rules relying on allocation of value added or similar measures be applicable. Alterna- tive indicators, such as gross output, might sometimes be applicable, but there is no general rule for identifying the single activity that best represents the mix included in this horizontal integration. Since patterns of horizontal integration have been con- sidered in the preparation of the classification, in many cases commonly integrated activities are included in the same class of ISIC even though their outputs have quite different characters. 121. For example, the production of crude glycerol is classified in ISIC class 2023 (Manufacture of soap and detergents, cleaning and polishing preparations, per- fumes and toilet preparations), while the production of synthetic glycerol is classified in class 2011 (Manufacture of basic chemicals). Crude glycerol is a by-product of soap manufacturing and therefore the production process of crude glycerol cannot be sepa- rated from the production process of soap; as a result, both productive activities have to be classified in the same ISIC class, even though their physical output is quite differ- ent. On the other hand, the production of synthetic glycerol is a chemical process quite distinct from the production of crude glycerol and these two activities are classified separately even though their physical output is quite similar. Another example would be the production of electricity through a waste-incineration process. The activity of waste disposal and the activity of electricity production cannot be separated in this case and ISIC assigns them, by convention, to class 3821. 122. In some cases, activities are carried out using the same factors of produc- tion but the activities also exist independently, i.e., neither one provides input into the other nor could it be considered as producing a by-product of the other activity. An example would be the combined transport of passengers and freight. Since both activities independently have a substantial size in most economies and are separately of interest for analytical purposes, they have not been combined in a single ISIC class. In this case, value-added substitutes should be used to determine the primary activity of the unit in question if both activities are carried out simultaneously. (d) The “top-down” method 123. The top-down method follows a hierarchical principle: the classification of a unit at the lowest level of the classification must be consistent with the classifica- tion of the unit at the higher levels. To satisfy this condition the process starts with the identification of the relevant category at the highest level and progresses down through the levels of the classification in the following way: Step 1. Identify the section that has the highest share of the value added. Step 2. Within this section, identify the division that has the highest share of the value added. Step 3. Within this division, identify the group that has the highest share of the valued added (see below for exception in the case of wholesale and retail trade activi- ties). Step 4. Within this group, identify the class that has the highest share of value added.
International Standard Industrial Classification of All Economic Activities (ISIC), Revision 4 24 Box 1 Example: Identifying the principal activity of a unit using the top-down method A reporting unit may carry out the following activities: Section Division Group Class Description of the class Share of value added (percentage) C 25 251 2512 Manufacture of tanks, reservoirs and containers of metal 7 28 281 2816 Manufacture of lifting and handling equipment 8 282 2821 Manufacture of agricultural and forestry machinery 3 2822 Manufacture of metal-forming machinery and machine tools 21 2824 Manufacture of machinery for mining, quarrying and construction 8 29 293 2930 Manufacture of parts and accessories for motor vehicles 5 G 46 461 4610 Wholesale on a fee or contract basis 7 465 4659 Wholesale of other machinery and equipment 28 M 71 711 7110 Architectural and engineering activities and related technical consultancy 13 The principal activity is then determined as follows: Step 1. Identify the section Section C Manufacturing 52 Section G Wholesale and retail trade; repair of motor vehicles and motorcycles 35 Section M Professional, scientific and technical activities 13 Step 2. Identify the division (within section C) Division 25 Manufacture of fabricated metal products, except machinery and equipment 7 Division 28 Manufacture of machinery and equipment n.e.c. 40 Division 29 Manufacture of motor vehicles, trailers and semi-trailers 5 Step 3. Identify the group (within division 28) Group 281 Manufacture of general-purpose machinery 8 Group 282 Manufacture of special-purchase machinery 32 Step 4. Identify the class (within group 282) Class 2821 Manufacture of agricultural and forestry machinery 3 Class 2822 Manufacture of metal-forming machinery and machine tools 21 Class 2824 Manufacture of machinery for mining, quarrying and construction 8 The principal activity is therefore 2822 (Manufacture of metal-forming machinery and machine tools), although the class with the biggest share of value added is class 4659 (Wholesale of other machinery and equipment). If a “bottom-up” approach is used, the reporting unit would be classified to wholesale trade in class 4659 (Wholesale of other machinery and equipment), based on the single largest share of value added at the class level. This would result in a reporting unit with a value added share in manufacturing of 52 per cent being classified outside of manufacturing.
Introduction
25
The top-down method may apply to only a small part of the statistical universe,
depending on the selection of the statistical unit, especially if the selected units are
defined so that they carry out only one activity.
124. If none of the ISIC classes accounts for at least 50 per cent of the value
added, in the case of wholesale and retail trade activities, additional steps are being
considered in step 3 of the above process, which can be considered to correspond
to additional levels in the classification. For practical reasons, these levels have not
been reflected as separate levels in the classification structure itself but rather con-
sist of clusters of ISIC, Rev.4 groups. For wholesale activities, these additional steps
relate to (a) the distinction between commission and own-account trade and (b) the
distinction between specialized and non-specialized trade. For retail trade activities,
these additional steps relate to (a) the distinction between store and non-store retail
trade, (b) the distinction between specialized and non-specialized trade (for in-store
retail trade activities) and (c) the distinction between trade via stalls and markets and
other trade (for non-store retail trade activities). These distinctions must be consid-
ered as additional levels (within step 3) and must be applied when using the top-down
method. After determining the correct group in step 3, the determination of the class
representing the principal activity is carried out in accordance with step 4 above.
125. Following the additional criteria provided in paragraph 124 above, the
following figure represents the decision tree to be used for the allocation of a unit
within ISIC division 46 (Wholesale trade, except of motor vehicles and motorcycles):
Division 46
Wholesale trade on own account
462–469
Wholesale trade on a fee or contract basis
461
Non-specialized
wholesale trade
469
Specialized wholesale
trade
462-466
462
463
464
465
466
(further subdivided according
to the range of products sold)
International Standard Industrial Classification of All Economic Activities (ISIC), Revision 4 26 126. Following the additional criteria provided in paragraph 124 above, the following figure represents the decision tree to be used for the allocation of a unit within ISIC division 47 (Retail trade, except of motor vehicles and motorcycles): Division 47 Retail trade in stores 471–477 Retail trade not in stores 478–479 Specialized 472–477 Non-specialized 471 472 473 474 475 476 477 (further subdivided according to the range of products sold) Via stalls and markets 478 Others 479 127. No attempt is made to reflect other possible aspects of retail activity, such as the kind of service (e.g., traditional service or self-service), outlets run by voluntary services or purchasing associations, or to distinguish between cooperative and other retail trade. Units whose main activity in terms of value added is obviously retail trade from shop premises must be allocated to one of the classes 4711 to 4774. 128. When choosing between specialized retail trade in ISIC groups 472–477 and non-specialized retail trade in ISIC group 471, the outcome will depend on the number of ISIC, Rev.4 classes involved, irrespective of the group-level importance. The following rules apply to make that determination (similar considerations apply to specialized vs. non-specialized wholesale trade activities): (a) If the products sold comprise up to four classes in ISIC, Rev.4 groups 472 to 477, none of which accounts for a share of 50 per cent or more in terms of value added but each of which represents 5 per cent or more of value added, a specialized trade is still involved. It is then necessary only to determine the focus of the activities on the basis of value added. Selecting first the main group and then the class within that group will determine the allocation of the principal activity; (b) If the products sold comprise five or more classes in groups 472 to 477, each representing 5 per cent or more of value added but none of which accounts for a share of 50 per cent or more, the unit should be classified as a non-specialized store and allocated to group 471. If food, beverages and tobacco represent at least 35 per cent of value added, allocation will be made to ISIC, Rev.4 class 4711. In all other cases, allocation should be to class 4719; (c) The above allocation rules are always based exclusively on the retail activity of the unit. If, in addition to its retail trade, a unit has a secondary activity that also provides services or produces goods, the allocation of the unit to the appropriate class of division 47 is determined only by the composition of its retail activity. In other words, the 5 per cent rule provided above applies to 5 per cent of the value added of all retail sale activities, not 5 per cent of the value added of all activities of the unit.
Introduction 27 Box 2 Example: Identifying the principal activity of a unit using the top-down method within wholesale and retail trade A reporting unit may carry out the following activities: Section Division Group Class Description of the class Share of value added (percentage) G 46 465 4651 Wholesale of computers, computer peripheral equip- ment and software 10 47 474 4741 Retail sale of computers, peripheral units, software and telecommunications equipment in specialized stores 8 4742 Retail sale of audio and video equipment in specialized stores 15 475 4759 Retail sale of electrical household appliances, furniture, lighting equipment and other household articles in specialized stores 4 476 4761 Retail sale of books, newspapers and stationary in specialized stores 3 4762 Retail sale of music and video recordings in specialized stores 12 479 4791 Retail sale via mail order houses or via Internet 35 N 77 772 7722 Renting of video tapes and disks 13 The principal activity is then determined as follows: Step 1. Identify the section Section G Wholesale and retail trade; repair of motor vehicles and motorcycles 87 Section N Administrative and support service activities 13 Step 2. Identify the division (within section G) Division 46 Wholesale trade, except of motor vehicles and motorcycles 10 Division 47 Retail trade, except of motor vehicles and motorcycles 77 Step 3. Identify the group (within division 47)
Step 3a. Identify store or non-store trade (within division 47) Groups 471–477 Retail trade in stores 42 Groups 478–479 Retail trade not in stores 35
Step 3b. Identify specialized or non-specialized trade (within groups 471-477) Recalculate shares of value added relative to total retail trade: Class 4741 = 8% / 77% 10 Class 4742 = 15% / 77% 19 Class 4759 = 4% / 77% 5 Class 4761 = 3% / 77% 4 Class 4762 = 12% / 77% 16 Only four classes account for a share of 5 per cent or more. Therefore the unit is classified to specialized retail sale.