North American Industry Classification System (NAICS) – Definition

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North American Industry Classification System (NAICS) Definition

The North American Industry Classification System (NAICS) was developed jointly by the U.S. Economic Classification Policy Committee (ECPC), Statistics Canada, and Mexico’s Instituto Nacional de Estadistica y Geografia to classify the businesses operated in North America, according to their type of economic activity (the process of production).

It was developed under the supervision of the Office of Management and Budget and was adopted in 1997. The NAICS was created to replace the U.S. Standard Industrial Classification System and provide a modernized and high-level compatibility system in business statistics among the North American countries.

A Little More on What is NAICS

The NAICSis reviewed and updated every five years to ensure its effectivity and relevance. In 2002 substantial changes were made in the construction, wholesale trade, retail trade, and information sectors. In the 2012 revision, the number of industries was slightly reduced in the system and some of the system’s sector classifications were modified.

In 2017, the number of industries was reduced from 1,065 to 1,057. The size standards were also modified in the revision which affected nine industries.

The North American Industry Classification System uses a hierarchical six-digit coding system. It classifies the businesses in 20 different industries according to their activities. Five of these industries are in the business of producing goods while 15 are providing services.

The North American Industry Classification System provides a code to each company indicating the sector they belong to. A company may operate in different sectors, the primary NAIC code depends on the main business, that is the business that earned the company most of its revenues at a specific location during the past year. The first two digits of the code indicate the largest business sector of the company. The third digit indicates the sub-sector it belongs to. The fourth digit is designated to indicate the industry group of its operation. The fifth digit of the code designates the NAICs industries and the last digit of the code designates the national industries.

The NAICs code for soybean farming is 111110, sector 11, subsector 111, industry group 1111, industry 11111 and NAICS code is 111110.

References for North American Industry Classification System

Academic Research on North American Industry Classification System (NAICS)

What’s my line? A comparison of industry classification schemes for capital market research, Bhojraj, S., Lee, C. M., & Oler, D. K. (2003). Journal of Accounting Research41(5), 745-774. According to this paper, four different industrial classification schemes was considered in a number of applications that is most common to the research in the capital market. After the comparison between these four schemes. The result obtained indicates that the GICS classification is a better option at explaining the stock returns as well as the cross-sectional variation in realized and forecasted growth rates, development and research expenditures, valuation multiples and various important financial ratios. Although, this paper also explains the different ways in which the other three methods differ4s from the GISC.

The North American industry classification system and its implications for accounting research, Krishnan, J., & Press, E. (2003). Contemporary Accounting Research20(4), 685-717. According to this research paper, several analysts have generally employed the use of Standard industrial classification (SIC) system which is used to assign firms to various industries. This study, however, focuses on the new development scheme change in the classification of the industry by seeing production as the yardstick for grouping firms, extensively rearranging the SIC categories, establishing uniformity amongst all NAFTA nations and by creating more than 358 new industries. This paper studies the implication of the changes adopted in the accounting research category by accessing the effectiveness of the NAFTA in forming industry groups and by using the financial ratio variance to estimate the intra-industry homogeneity

Using the North American Industry Classification System (NAICS) to identify national industry cluster templates for applied regional analysis, Kelton, C. M., Pasquale, M. K., & Rebelein, R. P. (2008). Regional Studies42(3), 305-321. This paper studies the update on the result of the North American Classification system which was used to identify the cluster in the national industry templates for the applied regional analysis. This study, however, updates this result by using the 1997 benchmark input-output accounts for the United States of America which is based on the North American Classification System (NAICS). This paper also explains the Feser and Bergman templates which were used to identify a more mixed sector template. Hence, this study explains the NAICS by explaining the national industry cluster templates for applied regional analysis.

Introducing the North American industry classification system, Murphy, J. B. (1998). Monthly Lab. Rev.121, 43. According to this paper, the study of the introduction of the North American industry classification system was explained and the scope of this phenomenon was also well analyzed in this research paper.

Implementing the North American Industry Classification System at BLS, Walker, J. A., & Murphy, J. B. (2001). Monthly Lab. Rev.124, 15. According to this paper, a new classification system which is regarded as a more important way of classifying industries and also used to track new changes and businesses in economic activities was studied. However, this paper indicates that the transition period of this system may be long and somewhat challenging to both the data users and the data collectors. Hence, this paper studies implementing in the North American Industry Classification system at the BLS.

North American product classification system: Concepts and process of identifying service products, Mohr, M., & Russel, S. A. (2002, September). In Proceedings of the 17th Annual Meeting of the Voorburg Group on Service Statistics. According to this paper, the process and concept of identifying the service products of the North American classification system were studied and various important explanations were given.

Approaching the challenges and costs of the North American industrial classification system (NAICS), O’Connor, L. (2000). The Bottom Line13(2), 83. According to this paper, a transition made from the standard industrial classification system to the North American industrial classification system will not be fast-tracked but the effect generated will be profound for information professionals and business researchers. This paper then defines the cost and challenges associated with this new implementation and then suggests for training and materials that can be used against any forthcoming situation/problem.

 

The importance of industry classification in estimating concentration ratios, Hrazdil, K., & Zhang, R. (2012). Economics Letters114(2), 224-227. According to this study, comparisons were made between different industry concentration ratio. This comparison as explained in this paper is based on the SIC system to the ratio based on the Global industry classification standard (GICS) system which can be used to show the analysis calculated by industry markups that the GICS-based strategies are better proxies for the actual industry concentration than the standard industry classification system measures.

 

Comparison between industrial classification systems in freight trip generation modelling, Campbell, S., Sanchez-Diaz, I., Lawson, C. T., Jaller, M., & Holguin-Veras, J. (2012).  (No. 12-3825). This academic research paper compared the classification system of two industries using the freight trip generation modelling which consists of the Standard industrial classification (SIC) and the North America Industry classification system (NAICS). The comparison, however, focuses on the difference between the ability of the model to generate and to replicate the input data via the industry sectors. According to this paper, two samples were used to arrive at the result and these samples were used to determine which of the system provides better results when used in the FTG modelling of the freight production and attraction.

 

Industry productivity trends under the North American Industry Classification system, Russell, M., Takac, P., & Usher, L. (2004). Monthly Labor Review127(11), 31-42. According to this research paper, the NAICS classification system presents a very consistent and effective scheme as well as a conceptual improvement for the measurement of productivity while a difference in performance was also seen by different industries. Also, an advantage of the NAICS-based productivity measure is that it helped reveal the overall rate of productivity in the 1990s and also after 2001 most especially in trade, manufacturing and in the newly defined information sector.

 

Using industry classification codes to sample high-technology firms: Analysis and recommendations, Kile, C. O., & Phillips, M. E. (2009). Journal of Accounting, Auditing & Finance24(1), 35-58. The paper studied the various methods for partitioning and selecting samples of high technology firms for the North American Industry Classification system, Standardized Industry Classification Code (SIC) and the Global Industry Classification System (GICS). However, this paper studies whether the GICS or NAICS codes provides improvements over the Standardized Industry Classification codes as a means of identifying firms that possess high technology as well as internet firms. it was recorded in this paper that the SIC codes are used in an information system, business, economics studies and also accounting to choose high-quality firms for further analyses.

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