1. ECONOMIC CLASSIFICATIONS Advanced course Day 2 – first morning session Statistical units and classification rules
Marie-Madeleine Fuger INSEE – France Gheorghe Constantinescu INSSE -Romania
Bucarest, 12–15 November 2013

2. Activity classification
Plan of session
Activity classification
Principal, secondary and ancillary activities
Statistical units
General classification rules
Top down method
Specific classification rules for some activities
Classification rules in practice

3. Type of activity
Are activities open on the market or only deserving a given unit?
Open on the market  Main (principal) or secondary
Internal (to the considered unit)  ancillary (they are undertaken in order to facilitate the main or secondary activities)
Just performed for the unit
Not sold on the market
Generally performed in all similar units
Produce services, with the exception of non-durable goods
Activities not to be considered as ancillary
All outputs at least partially sold (including « parts later integrated »)
Purchases to be resold without transformation
+ activities considered as investment (software, constructions, R&D, etc.)
+ Energy production

4. Legal and statistical units
Administrative units
Financial group
Legal unit
Local legal unit
(in French: établissement)
Statistical units
Enterprise
Local unit
Kind of activity unit
Enterprise Group
Local kind of activity unit (Establishment)
Local production homogeneous unit
Homogeneous production unit
National accounts
Institutional unit

5. Statistical units: what do they cover?
Be a financial group (or Group) the only known entity when starting an analysis process
The Enterprise group is the sum of all enterprises, not only the sum of legal units belonging to the Group
It is split (organized) in legal units LU
An analysis (« profiling ») structures the Group in Enterprises (autonomous decision centers).
Such a group can have one central decision center (e.g.) without any production (in such a case this legal unit has an auxiliary activity for the Group). The other autonomous decision centers (e.g.) (these legal units have an auxiliary activity for each enterprise).
Other external units can be ORGANIZATIONNALLY captives (slaves) of the Group (by restrictive contracts, not allowed to be open on the market) LU
and make an enterprise with legal units of the Group
and/or commercial links
financial
Theoretical definitions :
The enterprise group is an association of enterprises linked by

6. Classification rules General guideline
Determination of main or principal activity: the principal activity of a unit is the activity that contributes most to the gross value added at factor costs
in case that one activity accounts for more than 50% of value added, this activity determines the classification
in other cases, the top down method has to be used:
starting from the highest hierarchical level, determine the activity contributing most to value added,
then do the same for the second hierarchical level,
and so forth, until reaching the lowest hierarchical level

7. The « top-down » method
100 8 52 40 38 2 8 28 24 2 3 35 8 20 24 2 35 3 8 20 24 2 35 3 8 24 20 20

8. The « top-down » method to order the secondary activities
100 8 32 40 38 2 8 24 2 3 35 8 24 2 35 3 8 24 2 35 3 8 24 20
First secondary activity

9. The « top-down » method to order the secondary activities
100 8 32 5 3 2 8 24 2 3 8 24 2 3 8 24 2 35 3 8 24 20
Second secondary activity

10. The « top-down » method
For wholesale and retail trade, last step (class level) has to be refined
Why?
Additional levels exist that are not part of the NACE structure itself, e.g.
Own-account vs. fee-based
Specialized vs. non-specialized
In-store vs. not-in-store
Similar distinctions do not exist for other activities, such as manufacturing.

11. Top-down method in NACE 2 retail sale
Division 47
47.1 – 47.9
in store out of store
47.1 – – 47.9
in non-specialized stores in specialized stores on markets elsewhere –

12. Top-down method in NACE 2 wholesale
Division 46
46.1 – 46.9
Specialized and non specialised wholesale trade
46.2 – 46.9
Wholesale on a fee or
contract basis
46.1
Non specialised
46.9
Specialised
46.2 – 46.7
46.2
46.3
46.4
46.5
46.7
46.6

13. Top-down method in trade
The rules may sound complicated, but:
Reflect more complex composition of trade activities in NACE
Driven by the desire for more detail in this area
Provide necessary definitions for specialized vs. non-specialized trade activities

14. Top-down method in trade (cont.)
Criteria for specialized vs. non-specialized trade
Idea:
“Non-specialized” should involve a significant number of different product lines
“Noise items” should be ignored
Implementation:
It is considered to be “non-specialized” trade if products from five or more classes from NACE groups are involved (excluding those who make up less than 5% of value added), and if none of them make up more than 50% of value added.
Only trade activities are taken into account when computing percentages.

15. Value added and proxies
If data on value added are missing, use the following criteria to obtain the best approximates possible which would have been obtained on the basis of value added:
based on outputs
gross output or
value of sales
based on inputs
wages and salaries or
employment
Change of activity code of a unit
stability rule

16. Additional classification rules
Classification rules for specific production phenomena
vertical integration
production on a fee or contract basis / outsourcing
Mixed activities

17. Treatment of vertically integrated activities
Vertical integration of activities occurs where the different stages of production are carried out in succession by the same unit and where the output of one process serves as input to the next.
Examples of common vertical integration:
tree felling and subsequent sawmilling
production of wearing apparel in a textile mill

18. Treatment of vertically integrated activities
Vertical integration should be treated like any other form of multiple activities, i.e. the principal activity of the unit is the activity accounting for the largest share of value added, as determined by the top-down method.
No more conventions, even if some remain in ISIC.
If value added or substitutes cannot be determined for the individual steps in a vertically integrated process directly from accounts compiled by the unit itself, comparisons with similar units could be used. Alternatively, valuation of intermediate or final products could be based on market prices.
Generally, the main activity is the upstream activity

19. Outsourcing Definitions Outsourcing Principal Contractor
Contractual agreement according to which the principal requires the contractor to carry out specific tasks, such as parts of a production process or even the full production process, employment services or support functions.
Principal
Unit that enters into a contractual relationship with another unit (contractor) for that other unit to carry out specific tasks, such as parts of a production process or even the full production process, employment services or support functions.
Contractor
Unit that carries out specific tasks, such as parts of a production process or even the full production process, employment services or support functions on a contractual relationship with a principal.

20. Outsourcing Can take many forms: Outsourcing of manufacturing
Outsourcing of labour
Outsourcing of support functions
Outsourcing of parts of a production process
Outsourcing of the complete production process

21. Outsourcing - manufacturing
In manufacturing, the principal provides the contractor the technical specifications of the manufacturing activity to be carried out on the input material.
The input material (raw or intermediate good) can either be provided (owned) by the principal or not.
Contractors, i.e. units carrying out an activity on a fee or contract basis, are usually classified with units producing the same goods or services for their own account

22. Outsourcing - manufacturing
A principal who outsources only part of the transformation process is to be classified into manufacturing.
The activity of a principal who completely outsources the transformation process should be classified into manufacturing only if he owns the raw material used as input to the production process (and therefore owns the final output).
In all other cases, the activity of the principal should be classified in Section G "Wholesale and retail trade" (according to the type of operation and the specific good sold).
In this case the principal buys the good from the contractor and re-sells it without transformation

23. Outsourcing - manufacturing
Output of outsourced activities:
If principal owns the input materials:
Service
Principal
Contractor
Good
Output of outsourced activities:
If principal does not own the input materials:
Good
Principal
Contractor
Re-sale of good
= trade activity

24. Outsourcing – services
For services, the concept of a “service retailer” does not exist
If the whole process (service provision) is outsourced, both the principal and the contractor are classified to the same NACE class
If only a portion of the process is outsourced, the principal remains classified as if it were carrying out the complete process
If a separate class exists for the outsourced portion, the contractor is classified to that portion, otherwise to the same class as the principal

25. Outsourcing – support functions
This applies to the outsourcing of functions like accounting, computer services etc.
In this case, the principal is classified as if it were carrying out the complete core process. (In other words, support functions do not influence the classification of a unit.)
The contractor is classified to the specific support function it is carrying out.

26. Outsourcing – employment
Increasingly, companies emerge that provide only the labour force to their clients.
In turn, producers (e.g. manufacturers) may have little or no employment
In this case the principal is classified for what he does (as if it were operating with own employees).
The contractor is classified to NACE or 78.30, depending on the type of contract.
Also: outsourcing of labour or support functions does not influence the classification of the principal

27. Specific cases Manufacture associated with trade
Activities without rev
enue a.k.a. SPE
60.20 Activities of holding companies
60.30 Trusts, funds and similar financial entities
Activities of head offices

28. Thank you!