DEFINITION of 'North American Industry Classification System - NAICS'

The North American Industry Classification System (NAICS) is a new system of business classification, developed through a partnership between the United States, Mexico and Canada. This classification system allows for the comparison of statistics of all business activities across North America. Companies are classified and separated into industries that are defined by businesses utilizing the same or similar processes of production.

BREAKING DOWN 'North American Industry Classification System - NAICS'

The NAICS was established to take the place of and modernize the U.S. Standard Industrial Classification (SIC) system, allowing businesses to be classified and relatable to an ever-changing economy. The new system enables easier comparability between all countries in North America. To ensure that the NAICS continues to be relevant, plans are in place for a system review every five years.

The History of the NAICS

The NAICS is a collaborative effort. The three parties responsible for the formation and continued maintenance of the NAICS are the Instituto Nacional de Estadistica y Geografia (INEGI) in Mexico, Statistics Canada and the United States Office of Management and Budget (OMB) through its Economic Classification Policy Committee (ECPC) and staffed by the Bureau of Economic Analysis (BEA), Bureau of Labor Statistics (BLS) and the Census Bureau. The first version of the classification system was released in 1997. A revision in 2002 made room for substantial changes occurring in the information sector. The most recent revision, in 2012, slightly reduced the number of industries in the system and made modifications to some of the system’s sector classifications.

Breaking Down the System of Classification

This classification system allows for more flexibility than the four-digit structure of the SIC, instead utilizing a hierarchical six-digit coding system, classifying all economic activity into 20 different industry sectors. Five of these sectors are primarily those that produce goods with the remaining 15 sectors being strictly those that provide some type of service. Every company receives a primary NAICS code, indicating the company’s main line of business. This primary code is determined by the code definition that generates the largest revenue for said company at a specified location in the past year.

NAICS codes are parred down from 20 sectors into 99 three-digit subsectors, further divided into 312 four-digit industry groups, subdivided into 713 five-digit industries and ultimately broken down into 1,066 six-digit U.S. industries.

Reading an NAICS Code

The first two digits of a NAICS code indicate the largest business sector a company operates in. The third digit designates the company’s subsector and the fourth digit indicates the industry group to which the company belongs. The fifth digit of the code reflects the company’s particular industry of operation. The sixth and final digit designates the company’s specific national industry.

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