NACE Codes: What Are They and Why Do They Matter?
October 28, 2020
If you are doing business within the European Union, you will probably have heard of NACE codes. If not, this article is for you.
In this article, you will find out everything there is to know about them. We will explore:
- What a NACE code is
- What they are used for
- What the main characteristics of the NACE regulations are
- How to read them
- How they are classified
- And how they can help you
What is a NACE code?
The acronym NACE (Nomenclature of Economic Activities) designates the integrated classification system for products and economic activities. It designates the various statistical nomenclatures of economic activities developed since 1970 in the European Union.
The NACE codes are a European Industry-standard classification system similar in function to Standard Industry Classification (SIC) and North American Industry Classification System (NAICS) for classifying business activities.
NACE codes provide a framework for the collection and presentation, based on economic activity, of a wide range of statistics in economic fields such as production, employment, national accounts, and others.
The statistics produced on the basis of NACE codes are comparable at European level and more generally at the global level. The use of NACE codes is compulsory within the European statistics system.
The global comparability of statistics based on the NACE codes is explained by the fact that the NACE is part of an integrated system of statistical classifications, developed mainly under the auspices of the United Nations Statistics Division.
What are NACE codes used for?
NACE codes are the standard European nomenclature of productive economic activities. They break down the universe of economic activities in such a way that a NACE code can be associated with a statistical unit carrying out the activity it designates.
There is an economic activity when resources – such as capital goods, labour, manufacturing techniques or intermediate products – are combined to produce specific goods or services. All activity is characterized by input of resources, a production process and an output of products (goods or services).
An activity thus defined may consist of a single process (e.g. weaving), but can also include different sub-processes each relating to another classification category (thus, the manufacture of a car is broken down into activity specifics such as foundry, forging, welding, assembly, painting, etc.).
If the production process is organized to constitute an integrated series of elementary activities within a single statistical unit, the combination of all these activities is considered as one activity.
NACE codes are not intended to offer categories for particular types of unit statistics: the units can carry out several economic activities and can be defined in different ways depending on specific characteristics (the location in particular).
The main characteristics of NACE regulations
Member States and the Commission have made the use of NACE codes compulsory within the European Union. The regulations establishing NACE codes therefore contain provisions to this effect.
The statistics collected by the Member States and broken down by economic activity must be established on the basis of the NACE codes or a national nomenclature derived from it.
NACE regulations allow Member States to use, for national purposes, a national nomenclature derived from the NACE codes. However, this national version must correspond to the structural and hierarchical framework of the NACE codes.
Most Member States have developed their own version of the NACE codes, usually adding a fifth digit to meet their national needs. The Commission and a committee of representatives of the Member States are responsible for ensuring the proper implementation of the regulations, making minor changes (to take into account technological progress, for example) and ensuring contact with international organizations in charge of the classification of economic activities.
How to read a NACE code?
The NACE code is subdivided in a hierarchical structure with four levels. The highest level categories are called sections. Then the first two numbers of the code indicate the division, the third number indicates the group, and the fourth number indicates the class.
NACE uses four levels:
- Level 1: 21 sections identified by alphabetical letters A to U;
- Level 2: 88 divisions identified by two-digit numerical codes (01 to 99);
- Level 3: 272 groups identified by three-digit numerical codes (01.1 to 99.0);
- Level 4: 615 classes identified by four-digit numerical codes (01.11 to 99.00).
The first four numbers of the code which correspond to the first four tiers of the classification system are the same in all the European states. Individual countries may decide to add more levels. The fifth number might be different depending on the country and further numbers are sometimes added by database suppliers.
Here is an example to make it easier to understand:
Section (Q) Human health and social work activities
Division (86) Human health activities
Group (86.2) Medical and dental practice activities
Class (86.23) Dental practice activities
What countries use NACE codes?
NACE codes are used within the European community. Here is a list of all the countries that use them:
The characteristics of statistical nomenclatures
Describing observations in statistical terms cannot be done without systematic nomenclature. The nomenclature breaks down the universe of statistical observations into different sets that are as homogenous as possible with respect to the characteristics of the object of the statistical survey.
Statistical nomenclatures are characterized by:
- Exhaustive coverage of the area under observation;
- Mutually exclusive categories: each element can only be classified in one single category;
- Methodological principles ensuring the consistent classification of elements in the different categories of the nomenclature.
Hierarchical nomenclatures are more particularly characterized by subdivisions of finer and finer categories, making it possible to collect and present information to various levels of aggregation.
NACE codes class definition criteria
Criteria for how activities are combined into the units of production and distributed among them are fundamental for the definition of classes, which are the most detailed categories of the NACE code.
They must ensure that the classes of the NACE codes allow the sectoral classification of units and that the units under a given class carry out activities as similar to each other as possible.
NACE Rev. 2, which takes into account the fourth revision of ISIC, grants generally more value to the production process in defining the different classes. In other words, activities are grouped together when they include a process common for the production of goods or services, using similar technologies.
In addition, the NACE classes are defined in such a way that, as far as possible, the following two conditions are fulfilled:
- the production of the category of goods and services that characterises a given class represents the bulk of the production of units belonging to this class;
- the class contains the units which produce the major part of the category of goods and services that characterise it.
Another major aspect taken into account in defining the NACE classes is the relative importance of the activities to be included. In general, individual classes are provided for activities currently carried out in most countries of the Union or for activities of particular importance in the global economy. For the sake of international comparability, it was necessary to introduce a number of classes in ISIC and, therefore, in the NACE codes also.
Basic classification rules
Each unit appearing in a statistical business directory is associated with a NACE code according to its main economic activity. The main activity is that which contributes the most to the added value of the unit.
The allocation of NACE codes is facilitated by NACE explanatory notes, decisions taken by the NACE management committee and correspondence tables as well as references to other classification systems, such as ISIC, CPA, HS, CN, etc.
In the simple case where a unit carries out only one activity, the classification is determined by the section of NACE covering the activity of this unit. When a unit exercises several activities, the main activity is determined according to the added value corresponding to each activity.
Added value is the basic concept used to determine the classification of a unit according to the economic activity. Gross value added is, by definition, the difference between production of the unit and its intermediate consumption. It constitutes an additional measure of the contribution of each economic unit to gross domestic product (GDP).
Here is a full list of the NACE codes.
How NACE codes can help you on CONNECTS
Within business, it is always crucial to properly segment your sales outreach efforts. You should ensure that you are putting your products or services in front of a relevant audience that will be able to see the value in what you have to offer.
This is where NACE codes can be a valuable tool, as they make it easier to directly identify what segments of industry or what companies you want to target.
Once you have done this, CONNECTS allows you to find relevant companies which you can then contact to do business.
CONNECTS is a global business matchmaking platform. Working with Chambers of Commerce, the platform provides access to trustworthy leads, suppliers, partnerships, skills, and business communities. Indeed, every user on CONNECTS has been vetted and validated by a local Chamber of Commerce.
The CONNECTS search engine enables you to conduct a search based on industry. Once you have used the NACE codes to identity target industries, you can then use CONNECTS to find companies within those industries.
Interested? Enjoy a 1-month free trial, check out our pricing page! This offer includes:
- The opportunity to connect with all our members
- Validation by a moderator
- Access to the companies and member search tool
- View and create business opportunities
- Online training on how to use the platform