united nations statistics division isic rev.4 – some concepts and changes

United Nations Statistics Division

ISIC Rev.4 – Some concepts and ISIC Rev.4 – Some concepts and changeschanges

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ISIC – conceptsISIC – concepts

• Top-down methodTop-down method

• Vertical integrationVertical integration

• OutsourcingOutsourcing

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Top-down methodTop-down method• Method has not changed from previous Method has not changed from previous

versions of ISICversions of ISIC• Exception for trade activities have been made Exception for trade activities have been made

explicitexplicit

• Applies to units carrying out multiple Applies to units carrying out multiple activitiesactivities

-> selection of unit is important ! (but this is -> selection of unit is important ! (but this is not an ISIC issue)not an ISIC issue)

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Top-down methodTop-down method

• The top-down method follows a hierarchical The top-down method follows a hierarchical principle: the classification of a unit at the principle: the classification of a unit at the lowest level of the classification must be lowest level of the classification must be consistent with the classification of the unit at consistent with the classification of the unit at the higher levels of the structure. To satisfy this the higher levels of the structure. To satisfy this condition the process starts with the condition the process starts with the identification of the relevant position at the identification of the relevant position at the highest level and progresses down through the highest level and progresses down through the levels of the classification in the following way:levels of the classification in the following way:

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1.1. Identify the section which has the highest share Identify the section which has the highest share of the value added.of the value added.

2.2. Within this section identify the division which Within this section identify the division which has the highest share of the value added within has the highest share of the value added within this section. this section.

3.3. Within this division identify the group which has Within this division identify the group which has the highest share of the valued added within this the highest share of the valued added within this division.division.

4.4. Within this group identify the class which has the Within this group identify the class which has the highest share of value added within this group.highest share of value added within this group.

(Box 1)(Box 1)

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• For wholesale and retail trade, step 3 has to For wholesale and retail trade, step 3 has to be refinedbe refined

• Why?Why?• Additional levels exist that are not part of Additional levels exist that are not part of

the ISIC structure itself, e.g.the ISIC structure itself, e.g.• Own-account vs. fee-basedOwn-account vs. fee-based• Specialized vs. non-specializedSpecialized vs. non-specialized• In-store vs. not-in-storeIn-store vs. not-in-store

(Box 2)(Box 2)

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The rules may sound complicated, but:The rules may sound complicated, but:

• Reflect more complex composition of trade Reflect more complex composition of trade activities in ISICactivities in ISIC• Driven by the desire for more detail in this areaDriven by the desire for more detail in this area

• Provide definitions for specialized vs. non-Provide definitions for specialized vs. non-specialized trade activitiesspecialized trade activities

• ““the line has to be drawn somewhere”the line has to be drawn somewhere”

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Treatment of vertically integrated Treatment of vertically integrated activitiesactivities

• Vertical integration of activities occurs Vertical integration of activities occurs where the different stages of production are where the different stages of production are carried out in succession by the same unit carried out in succession by the same unit and where the output of one process serves and where the output of one process serves as input to the next.as input to the next.

• Examples of common vertical integration:Examples of common vertical integration:• tree felling and subsequent sawmillingtree felling and subsequent sawmilling• production of wearing apparel in a textile millproduction of wearing apparel in a textile mill

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Treatment of vertically integrated Treatment of vertically integrated activitiesactivities

• Vertical integration should be treated like any other form Vertical integration should be treated like any other form of multiple activities, i.e. the principal activity of the unit of multiple activities, i.e. the principal activity of the unit is the activity accounting for the largest share of value is the activity accounting for the largest share of value added, as determined by the top-down method. added, as determined by the top-down method.

• This treatment has changed from previous versions of This treatment has changed from previous versions of ISIC. ISIC.

• If value added or substitutes cannot be determined for the If value added or substitutes cannot be determined for the individual steps in a vertically integrated process directly individual steps in a vertically integrated process directly from accounts compiled by the unit itself, comparisons from accounts compiled by the unit itself, comparisons with similar units could be used. Alternatively, valuation with similar units could be used. Alternatively, valuation of intermediate or final products could be based on market of intermediate or final products could be based on market prices. prices.

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Stability ruleStability rule

• Units may change their principal activity, either Units may change their principal activity, either at once or gradually over a period of time, either at once or gradually over a period of time, either because of seasonal factors or because of a because of seasonal factors or because of a management decision to vary the pattern of management decision to vary the pattern of output. While all these cases call for the output. While all these cases call for the classification of the unit to be changed, too classification of the unit to be changed, too frequent changes could result in inconsistencies frequent changes could result in inconsistencies between short term (monthly and quarterly) and between short term (monthly and quarterly) and longer term statistics, making their interpretation longer term statistics, making their interpretation extremely difficult.extremely difficult.

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Stability rule Stability rule

• Whenever a unit performs two activities both Whenever a unit performs two activities both contributing to around 50% of the value added, a contributing to around 50% of the value added, a stability rule has been established in order to avoid stability rule has been established in order to avoid frequent changes not reflecting a substantial frequent changes not reflecting a substantial change in the economic reality. According to this change in the economic reality. According to this rule, the change of the principal activity should be rule, the change of the principal activity should be made when the current one had been accounting made when the current one had been accounting less than 50% of the value added for at least two less than 50% of the value added for at least two years.years.

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OutsourcingOutsourcing

Can take many forms:Can take many forms:

• Outsourcing of labourOutsourcing of labour

• Outsourcing of support functionsOutsourcing of support functions

• Outsourcing of parts of a production Outsourcing of parts of a production processprocess

• Outsourcing of the complete production Outsourcing of the complete production processprocess

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Outsourcing - Terminology:Outsourcing - Terminology:• PrincipalPrincipal = unit that enters in a contractual relationship = unit that enters in a contractual relationship

with another unit (here called contractor) to carry out with another unit (here called contractor) to carry out some part of the whole production process. Sometimes, some part of the whole production process. Sometimes, the terms "converter" or "contractor" had also been used. the terms "converter" or "contractor" had also been used.

• ContractorContractor = unit that carries out a specific production = unit that carries out a specific production process based on a contractual relationship with a process based on a contractual relationship with a Principal. The term "subcontractor" had been used too. Principal. The term "subcontractor" had been used too. In NACE, the activities performed by the contractor are In NACE, the activities performed by the contractor are denominated "on a fee or contract basis".denominated "on a fee or contract basis".

• OutsourcingOutsourcing = contractual agreement according to which = contractual agreement according to which the principal requires the contractor to carry out a the principal requires the contractor to carry out a specific production process. Sometimes, the term specific production process. Sometimes, the term "subcontracting" is used as well."subcontracting" is used as well.

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• The principal and the contractor may be The principal and the contractor may be located in the same economic territory or in located in the same economic territory or in different economic territories: the actual different economic territories: the actual location does not affect the classification of location does not affect the classification of either one of these units.either one of these units.

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• Contractors, i.e. units carrying out an Contractors, i.e. units carrying out an activity on a fee or contract basis, are activity on a fee or contract basis, are usually classified with units producing the usually classified with units producing the same goods or services for their own same goods or services for their own accountaccount

• Exceptions:Exceptions:• TradeTrade• ConstructionConstruction

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Outsourcing - manufacturingOutsourcing - manufacturing

• In manufacturing, the principal provides the In manufacturing, the principal provides the contractor the technical specifications of the contractor the technical specifications of the manufacturing activity to be carried out on manufacturing activity to be carried out on the input material. the input material.

• The input material (raw or intermediate The input material (raw or intermediate good) can either be provided (owned) by good) can either be provided (owned) by the principal or not.the principal or not.

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• A principal who outsources only part of the A principal who outsources only part of the transformation process is to be classified transformation process is to be classified into manufacturing.into manufacturing.

• A principal who completely outsources the A principal who completely outsources the transformation process should be classified transformation process should be classified into manufacturing into manufacturing only ifonly if he owns the raw he owns the raw material used as input to the production material used as input to the production process (and therefore owns the final process (and therefore owns the final output).output).

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• In all other cases, the principals should be In all other cases, the principals should be classified according to the value added classified according to the value added principle: it might be in Section G principle: it might be in Section G "Wholesale and retail trade" (according to "Wholesale and retail trade" (according to the activity and the specific good sold), or the activity and the specific good sold), or in other Sections such as M "Professional, in other Sections such as M "Professional, Scientific and technical activities“ (e.g. Scientific and technical activities“ (e.g. designers).designers).

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• Output of outsourced activities:Output of outsourced activities:• If principal owns the input materials:If principal owns the input materials:

Principal ContractorService

Good

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• Output of outsourced activities:Output of outsourced activities:• If principal does not own the input materials:If principal does not own the input materials:

Principal ContractorGood

Re-sale of good= trade service

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Issues in individual ISIC sectionsIssues in individual ISIC sections

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New classes in ISIC section KNew classes in ISIC section K

• In section K, two classes have been introduced In section K, two classes have been introduced that go beyond the traditional scope of ISIC in that go beyond the traditional scope of ISIC in covering economic production:covering economic production:• 6420 "Activities of holding companies"6420 "Activities of holding companies"• 6430 "Trusts, funds and similar financial entities"6430 "Trusts, funds and similar financial entities"

(Holding companies existed before in ISIC, but (Holding companies existed before in ISIC, but terminology was not clear – conflicting with SNA)terminology was not clear – conflicting with SNA)

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• Units classified in these two classes do not Units classified in these two classes do not have any revenue from the sale of products, have any revenue from the sale of products, and usually do not employ staff (except and usually do not employ staff (except possibly one or a few persons acting as possibly one or a few persons acting as legal representatives). legal representatives).

• Such units are sometimes also known as:Such units are sometimes also known as:"brass plates", or "postal boxes" or "empty "brass plates", or "postal boxes" or "empty

boxes", or "special purpose entities - SPEs"boxes", or "special purpose entities - SPEs"• They are numerous in some countries They are numerous in some countries

because of tax advantages. because of tax advantages.

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• When classifying a unit according to When classifying a unit according to these two classes, attention should be these two classes, attention should be paid also to other classes (two of them paid also to other classes (two of them in section M, division 70) namely in section M, division 70) namely classes 7010 "Activities of head classes 7010 "Activities of head offices" and 7020 "Management offices" and 7020 "Management consultancy activities".consultancy activities".

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New classes in ISIC section KNew classes in ISIC section KSpecifically:Specifically:• 6420 "Activities of holding companies" refers to 6420 "Activities of holding companies" refers to

activities of holding companies, whose principal activities of holding companies, whose principal activity is owning the group, and that do not activity is owning the group, and that do not administer or manage the group;administer or manage the group;

• 6430 "Trusts, funds and similar financial 6430 "Trusts, funds and similar financial entities" is very particular in ISIC, as it does not entities" is very particular in ISIC, as it does not refer to an economic activity, but to units;refer to an economic activity, but to units;

• 6630 "Fund management activities" includes 6630 "Fund management activities" includes activities carried out on a fee or contract basis;activities carried out on a fee or contract basis;

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And (in section M):And (in section M):

• 7010 "Activities of head offices" includes the 7010 "Activities of head offices" includes the overseeing and managing of the related units, overseeing and managing of the related units, exercising the operational control and day-to-day exercising the operational control and day-to-day managing;managing;

• 7020 “Management consultancy activities" 7020 “Management consultancy activities" includes the consultancy activities related to issues includes the consultancy activities related to issues like corporate strategic and organisational like corporate strategic and organisational planning, marketing objectives and policies, planning, marketing objectives and policies, human resources policies etc.human resources policies etc.

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• The identification of the principal activity The identification of the principal activity of a unit performing several activities of a unit performing several activities among those just mentioned should be among those just mentioned should be made, as usual, on the basis of the value made, as usual, on the basis of the value added principle. It should be taken into added principle. It should be taken into account that capital gains do not constitute account that capital gains do not constitute value added, and therefore they should not value added, and therefore they should not be considered. be considered.

united nations statistics division isic rev.4 – some concepts and changes

Documents

method method

isic structure

isic issue slide

retail trade

highest level

isic concepts

changes slide

highest share of value