Archived - Introduction to North American Industry Classification System (NAICS) 2002 - Canada

Introduction

• NAICS
• Structure and Coding System of NAICS and NAICS Canada
• Historical Background
• The Conceptual Framework of NAICS
• The Development of NAICS
• Statistical Units
• Definitions
• Reporting Arrangements
• The Relationship of NAICS Canada and the International Standard Industrial Classification ( ISIC Rev 3)

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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 , is 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.

Businesses (and other organizations) undertake activities and produce goods and services. Economic activities can be described in terms of the combination of resources (the labour, capital, raw material and service inputs associated with a production process) that are used to produce goods and services. Businesses maintain accounting records about their activities. Their accounts mirror their management or operating structure. In its simplest form, the operating structure of a business will be composed of a single producing unit in which the function of management and production are combined. In large businesses, the producing units at which, or from which, production takes place may be grouped into an organizational unit for financial management, administrative or accounting purposes. In complex businesses, there may be a hierarchical grouping of producing units into more than one level of organizational units, for which different accounting records are maintained.

For single unit businesses, the financial and production data that will be available through their accounting records will be about the same unit. In the case of complex businesses, consolidated financial and balance sheet accounts are maintained for the higher-level organizational units of the operating structure and production accounts are maintained for producing units.

The organizational unit of the business that has autonomy with respect to financial and investment decision making, as well as the authority to allocate resources for the production of goods and services, is described as the enterprise. It is the level at which consolidated financial and balance sheet accounts are maintained. Producing units are described as establishments when the business maintains records about their activities, from which it is possible to compile information about the value of their output, material and service inputs and the extent to which labour and capital were used in the production of output. They may produce goods and services for sale to other establishments, or they may produce goods for further processing by other establishments within the same enterprise. Producing units are described as ancillary units when they are separate units that manage, administer or produce services for the use of other establishments belonging to the same enterprise. In small businesses the establishment and the enterprise often coincide. Generally, financial statistics are compiled for enterprises and production statistics are compiled for establishments (and ancillary units).

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 (and locations). 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 or production processes used.

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 can also be used for classifying enterprises (and companies). However, when NAICS is used for the classification of enterprises and the compilation of financial statistics of businesses, 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 enterprises. Hence, there will be a few large and complex 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, the larger proportion of the activities of each complex enterprise are 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 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 enterprise level data will show a different industrial distribution, when classified to NAICS , than will their establishment level data, and the two sets of data will not be directly comparable.

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.

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Structure and Coding System of NAICS and NAICS Canada

NAICS is the agreed upon common framework for the production of comparable statistics by the statistical agencies of the three countries, Canada, Mexico and the United States. Its hierarchical structure is composed of sectors (two-digit code), subsectors (three-digit code), industry groups (four-digit code), and industries (five-digit code).

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 , differences in the organization of production in the economies of the three countries or time constraints necessitated certain exceptions. For certain of the sectors or subsectors, three-country agreement was reached only on their boundaries rather than on detailed industry structures. The sectors (subsectors) falling into this category are utilities; wholesale trade; retail trade; securities, commodity contracts, and other financial investment and related activities; real estate; lessors of other non-financial intangible assets (except copyrighted works); waste management and remediation services; personal and laundry services; religious, grant-making, civic and professional and other membership organizations; and public administration. In other instances, agreement was reached only up to the industry group level.

Because of the similarity in the way their economic activities are organized, greater comparability was reached between Canada and the United States. For each of the sectors named above, except wholesale trade and public administration, Canada and the United States have agreed upon a structure that maximizes data comparability between them.

NAICS agreements permit each country to create industries below the NAICS 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 industries. The sixth digit is used to designate national industries.

In general, the use of the same code indicates that the sector, subsector, industry group, industry or national industry are comparable, even if the title used in the three countries may differ because of differences in the use of language. In only a few cases, because it was necessary for the U.S. to use all of the numbers available to establish their national detail, has the same code been used for different industries (the codes are 323119, 332999, and 334512).

NAICS with Canadian detail will be designated NAICS Canada, while Mexico and the United States will produce NAICS with their own six-digit detail, which they will publish as SCIAN Mexico and 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 2002. A superscript "CAN" (^CAN) indicates a Canadian industry, "Mex" (^MEX) indicates Canadian and Mexican industries are comparable, and "US" (^US) indicates Canadian and United States industries are comparable. When no superscript appears, the Canadian, Mexican and United States industries are comparable.

NAICS Canada 2002 consists of 20 sectors, 103 subsectors, 328 industry groups, 728 industries and 928 national industries and replaces NAICS Canada 1997. Concordances showing the relationship between the changed sectors of these two versions of NAICS Canada are shown in the Concordance chapter of this manual.

The structure and hierarchy of NAICS has been designed to allow for maximum data comparability among three countries whose economies differ in size and complexity, rather than to reflect the size or importance of industries in each country. Therefore, some Canadian industries that were at the three-digit level of the 1980 SIC can now be found at the five- and six-digit levels of NAICS Canada.

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Historical Background

Statistics Canada has developed and used Standard Industrial Classifications (SIC) of different vintages since 1948. The first Canadian Standard Industrial Classification was developed in 1948 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 for their use. 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, among other characteristics, 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 of Companies and Enterprises was produced for the compilation of financial statistics related to enterprises. This classification, designed for the classification of companies and enterprises, took account of vertically integrated 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 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.

Changes to Canadian and world economies continue to impact on classification systems. 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 has been revised and comparability has been 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.

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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. Previous Canadian SIC 's and for that matter the International Standard Industrial Classifications of the United Nations ( ISIC , ISIC Rev 1, ISIC Rev 2 and ISIC Rev 3), 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.

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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.

1. NAICS would be based on a production-oriented or supply-based conceptual framework. This means that producing units that use similar production processes would be grouped together in NAICS .
2. Special attention would be given to developing production-oriented classifications for
   1. new and emerging industries
   2. services industries in general and
   3. industries engaged in the production of advanced technologies.
3. 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 required for sectors where the United States, Canada and Mexico had incompatible definitions.
4. 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 Rev 3) by minimising the extent to which the lowest levels of NAICS crossed the boundaries of the 2-digit level of ISIC Rev 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 US on December 10, 1996.

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Statistical Units

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 standardised model developed at Statistics Canada for business surveys consists of a four-level hierarchy of business units. They are the Enterprise, the Company, the Establishment and the Location.

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Definitions

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.

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.

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. If an establishment crosses provincial boundaries, it is split into two establishments. 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, stations etc. 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.

In some complex businesses, there are units that exclusively produce services in support of other units within the same enterprise. Examples of such units are transportation units, central administrative units and head offices. Such units are known as ancillary units and they are delineated according the number and location of establishments that they serve or manage and the availability of accounting information concerning their operations. Three typical cases can be described.

When the ancillary unit manages or serves only one establishment, a separate location is identified, reporting to the establishment managed or served. An exception is made in the case where the two locations are in different provinces, in which case two establishments are delineated. An example of this case is a mining company with a mining location in one province and a head office location in another province. Two establishments would be delineated, one coded to Mining and the other to the Head Office Industry.

When the ancillary unit manages or serves more than one establishment, but there is insufficient accounting information to delineate it as an establishment, it is identified as an ancillary establishment, with an accompanying location.

Finally, if the ancillary unit manages or serves more than one establishment and it is a cost centre or a discretionary expense centre for which data on all its costs including labour and depreciation can be reported by the business, it is identified as an establishment, with an accompanying location.

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.

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 of resources 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.

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Reporting Arrangements

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. For example, it may be necessary to obtain information about goods and services purchased for the use by establishments from a Head Office, which could be at the company level, and to allocate the costs back to the using establishments, whether this is done in the accounting records of the business or not.

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Determining the Unit's Industry Classification

The Classification of Establishments

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 most cases, when an establishment is engaged in more than one activity, the activities are treated as independent. The activity with the largest value-added (value of outputs minus cost of inputs) is identified as the establishment's principal activity, and the establishment is classified to the industry corresponding to that activity. In practice, it is often necessary to use other variables, such as revenue, shipments or employment, as proxies for value-added.

In some cases, however, combined activities are given special recognition. These combinations occur in both goods-producing and services-producing sectors. They are a consequence of the technology of production or of efficiencies to be gained from combining certain activities in the same establishment.

Some of these combinations occur so commonly or frequently that the combination can be treated as an activity in its own right, and explicitly classified to an existing industry or to an industry created for the combination. An example of a combined activity for which a single industry has been created is shipbuilding and repairing. Shipyards have production facilities, such as dry docks, that can be used either to build new ships or to repair ships. A typical establishment will do both in varying degrees depending upon the relative demand for new ships and repair services. A single industry, Shipbuilding and Repairing (336611), has therefore been created for classifying all establishments engaged in this combination of activities. A different type of combination of activities is that of establishments engaged in the sale of new cars that often also engage in providing repair services. In NAICS , they are coded to New Car Dealers (44111), regardless of their major source of revenue in any given period. The classification does not attempt to take account of all possible combinations of activities, but rather identifies those that normally occur together and are economically significant.

The ratio of the various outputs of a combined activity can change with the business cycle. However, movements of establishments from one industry to another should be based on significant and lasting shifts in their activities. In general, a period longer than a year is appropriate before changing the industry classification of establishments with mixed activities. It is a principle of NAICS that an establishment should remain classified in the same industry unless its production process changes. Once the combined activity is recognized to be a distinct activity or production process, rather than using the primary activity rule, it is in the interest of stability that the combination be coded to one industry, regardless of the relative importance of the different activities as sources of revenue in any given period.

Another type of combined activity is the joint production of goods and services. These are activities that involve the production of two or more products, with the same factors of production, in the same establishment. These types of combined activities are arbitrarily assigned to a single industry class in NAICS . An example is the production of meat and of raw hides, both of which are the product of animal slaughtering. They are produced simultaneously by the same production process. This combined activity is assigned to the Animal (except poultry) Slaughtering industry (311611). Another example is that of sugar and molasses, which is assigned to the Sugar Manufacturing industry (31131).

Finally, another type of combined activity involves establishments engaged in activities that are related by virtue of vertical integration, in other words in activities in which the output of one stage of production is the input to a later stage of production. In these cases, the general rule is that the establishment is classified to the activity of the last stage of production. There are exceptions to the rule, however. Where an earlier stage is vastly predominant in terms of technology, machinery, equipment and labour, the establishment is classified according to the activity associated with that earlier stage of production. Examples include establishments that make steel and also produce steel castings, which are classified to Iron and Steel Mills and Ferro-Alloy Manufacturing (33111) and establishments that produce, pulp, paper and paper products, which are classified to Paper Mills (32212).

Vertically integrated activities are also defined in the services-producing sectors. For example, while establishments that design software to customer specifications are classified in Computer Systems Design and Related Services (54151), establishments that both design and publish software are classified as Software Publishers (51121).

The Classification of Ancillary Units

Ancillary units can be classified in two ways. They can be classified to the industry of their own activity or to the principal industry of the establishments managed or served. For example, a transportation unit that serves manufacturing establishments can be classified to transportation (its own activity) or to manufacturing (the activity managed or served). The System of National Accounts^{Footnote 1} advocates the allocation of the costs of ancillary units to the output of all the establishments managed or served by them. For the compilation of provincially disaggregated industrial statistics, however, it is necessary to show the employment and value-added of separate ancillary units against their own activity, in the province in which they are located. To meet these competing requirements, Statistics Canada has adopted the following practices.

In the case of an ancillary unit that manages or serves only one establishment, the separate ancillary location is classified to its own activity. Where the two locations are in different provinces, and therefore two establishments have been delineated, the ancillary location and establishment will be classified to their own activity.

When the ancillary unit manages or serves more than one establishment, but there is insufficient accounting information to delineate it as an establishment, the ancillary establishment will be classified to the principal activity of the units managed or served, while the accompanying ancillary location will be classified to its own activity.

Finally, in the case of an ancillary unit that manages or serves more than one establishment and for which all necessary data required to identify it as an establishment are available, both the establishment and the accompanying location will be classified to their own activity.

The Classification of Companies

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 majority of its value-added.

The Classification of Enterprises

It has been pointed out above that NAICS is not specially designed for the classification of complex enterprises, that is those with establishments in different NAICS sectors. However, enterprises can be classified to NAICS by using the principle of assigning the enterprise to the industry of the establishment or group of establishments that account for the largest proportion of the value added of the enterprise. In general, the higher levels of NAICS better represent the activities of diversified enterprises engaged in many activities.

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The Relationship of NAICS Canada and the International Standard Industrial Classification (ISIC Rev 3)^{Footnote 2}

Recognizing that economic statistics are substantially more useful if they are also internationally comparable, the Economic and Social Council of the United Nations adopted the original version of the International Standard Industrial Classification (ISIC) in 1948. Since then, ISIC has been revised in 1958, 1968 and most recently in 1989. At this time, the Council recommended that member states adopt, as soon as possible, ISIC Revision 3, with such modifications as may be necessary to meet national requirements, without disturbing the framework of the classification and use ISIC Rev 3 in reporting data classified according to kind of economic activity for the purposes of international comparison.

In accordance with these recommendations and mindful of the need to provide data classified to ISIC Rev 3 for purposes of international comparability, the statistical agencies of the three North American countries agreed that, in the development of NAICS , they would strive to create industries that, at least, did not cross the two-digit boundaries of ISIC Rev 3. This minimal agreement was reached in the knowledge that very detailed comparison would not be possible without considerably greater harmonization.

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 Rev 3 that forms the conceptual basis of NAICS which makes it unique among industrial classifications in being based on a single criterion.