Carter Hoffman

Carter is a Research Associate at Trade Finance Global focusing on the impact of macroeconomic trends and emerging technologies on international trade. He holds international business and science degrees from the European Business School in Germany as well as Brock University and Queen’s University in Canada where he served as the director of operations and finance for the student executive council and as an operations associate for the Queen’s University Alternative Asset Fund. Carter’s work has been featured in publications and articles supported by the SME Finance Forum, managed by the International Finance Corporation, World Trade Organization, and International Chamber of Commerce.

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The North American Industry Classification System (NAICS) and the Standard Industrial Classification (SIC) system classify businesses based on their primary economic activities. However, they differ in several key aspects, reflecting their distinct purposes and the evolution of industry classification over time.

NAICS vs. SIC: Understanding key differences in classification systems

SIC code

Developed in the 1930s, the SIC system was traditionally used in the United States to classify industries based on business activities. Its primary purpose was to promote the comparability of establishment data, providing insights into different aspects of the US economy.

NAICS

Introduced in 1997, NAICS replaced the SIC system to provide new classification standards in response to the changing economic landscape, particularly with the emergence of new sectors such as services and information technology. 

NAICS was jointly developed by Canada, the United States, and Mexico to create a common industry classification system. This system allows for a high level of comparability in business statistics among North American countries.

Structure and detail: Navigating industry classifications

SIC code

The SIC code is a four-digit system in which each digit represents a progressively narrower industry classification. It is less detailed than NAICS, particularly in the services and information sectors.

NAICS

NAICS uses a six-digit code system. The first two digits designate the economic sector, the third digit designates the subsector, the fourth digit designates the industry group, the fifth digit designates the industry, and the sixth digit designates national industries. 

This additional detail allows for more specific classification and flexibility in accommodating new industries.

Key differences between SIC and NAICS codes

• Structure and flexibility: NAICS codes have a six-digit structure that offers greater detail and flexibility than the four-digit SIC codes, allowing them to better accommodate new industries and economic conditions.
• Scope of coverage: NAICS codes cover a broader range of sectors, particularly in the services sector, which has grown significantly over the past few decades.
• Review and updates: NAICS codes are updated every five years to reflect economic and emerging industry changes. This regular updating process ensures the classification system remains relevant as industries evolve. In contrast, the SIC codes are less frequently updated, with the last significant update in 1987. Due to this infrequency, SIC codes inadequately capture the newer industries that have emerged in the last few decades.
• International standardisation: NAICS codes are designed to be compatible with the statistical systems of Canada and Mexico due to the trilateral agreement under USMCA, making international economic analysis more feasible.

Usage

SIC code

While officially replaced by NAICS in 1997, SIC codes are still used by some companies and databases of data analysis and business segmentation that align with historical data.

NAICS

NAICS is used widely across various governmental statistical agencies, business communities, and international organisations to analyse economic activity, shape public policy, and facilitate economic analysis.

Implications for businesses

Using the appropriate classification system is crucial for businesses as it affects how they are viewed statistically and can impact everything from taxation to eligibility for government contracts. NAICS’ broader scope and updated structure make it more useful for contemporary economic analyses and decision-making.

How to find a business’s NAICS or SIC code

Businesses can find their NAICS or SIC codes by using tools provided on government websites, such as the US Census Bureau’s NAICS search tool. These tools allow businesses to search by keyword or to drill down through various categories to find their specific code.

Uses of NAICS and SIC codes in business operations

• Regulatory compliance: Many regulatory filings require businesses to provide their NAICS or SIC codes, which can affect compliance with industry-specific regulations.
• Market research: Analysts use NAICS and SIC codes to segment markets and analyse competitive environments, helping businesses strategise and identify market opportunities.
• Statistical reporting: Governments use these codes to organise and present accurate industry data, which can influence policy-making and economic forecasting.

SIC and NAICS code examples

Here are examples of commodities along with their respective SIC and NAICS codes, providing insight into how these classification systems delineate various industry segments:

Lumber (Wood)

• SIC Code: 2421 – Sawmills and Planing Mills
• NAICS Code: 321113 – Sawmills

Precious Metals (Gold, Silver)

• SIC Code: 1041 – Gold Ores
• NAICS Code: 212221 – Gold Ore Mining

Oil and Gas

• SIC Code: 1311 – Crude Petroleum and Natural Gas
• NAICS Code: 211120 – Crude Petroleum Extraction

Agricultural Products (Corn)

• SIC Code: 0115 – Corn
• NAICS Code: 111150 – Corn Farming

Chemicals

• SIC Code: 2819 – Industrial Inorganic Chemicals, Not Elsewhere Classified
• NAICS Code: 325180 – Other Basic Inorganic Chemical Manufacturing

These examples illustrate the specific and detailed nature of how industries and products are classified within both the SIC and NAICS systems, enabling precise data collection, analysis, and reporting across diverse economic sectors.

Which regions use which codes?

The use of NAICS or SIC codes varies by region and is often influenced by trade relationships, historical factors, and regional economic integration. Here’s a breakdown of which regions use which system and their adaptations:

North America

United States: The United States primarily uses the NAICS code to classify business establishments. The NAICS system was developed to replace the older SIC system, providing a more updated framework for understanding economic activities.

Canada: Canada uses the NAICS system, which was jointly developed with the United States and Mexico. Canada’s use of NAICS facilitates consistent economic data analysis and reporting across North America.

Mexico: Mexico adopts NAICS for the same reasons as the US and Canada, ensuring a unified economic classification system across the three constituting the USMCA (formerly NAFTA).

European Union

The EU does not use the SIC system but instead uses the Statistical Classification of Economic Activities in the European Community, known as NACE. This system is closely aligned with the international standard ISIC, which allows for compatibility in economic analysis both within the EU and globally.

United Kingdom

The UK uses its own version of the SIC codes, which are aligned with the European NACE system, to ensure compatibility with EU data and reporting standards despite Brexit.

Other Global Trade Hubs

Asia: Various Asian countries use systems that are often aligned more closely with the International Standard Industrial Classification (ISIC) rather than strictly using NAICS or SIC. Countries like India and China have their own classification systems, which are adapted from and comparable to ISIC.

Australia and New Zealand: These countries use the Australian and New Zealand Standard Industrial Classification (ANZSIC), which was developed jointly for better regional integration and comparison. ANZSIC is aligned with ISIC to some extent to ensure broader compatibility.

South America: Like Asia, many South American countries use classification systems derived from or compatible with ISIC. While trade agreements with North American countries might influence some use of NAICS, it is more common for South American countries to reference ISIC for international trade and economic analysis.

Towards global standardisation: Industry classification systems in perspective

The global trend in industry classification demonstrates a strong preference for either directly adopting ISIC or creating regional systems that adhere to ISIC standards for enhanced international compatibility. Meanwhile, NAICS remains specific to North American countries for more localised economic analysis and reporting.

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