V. ESTABLISHMENTS AND INDUSTRIES
C. Partitioning enterprises into more homogeneous units
| 5.17. | As already stated, "enterprise" is the term used in the System to describe an institutional unit in its capacity as a producer of goods and services. An enterprise may, therefore, be any of the following kinds of producer units:
A corporation or quasi-corporation
An unincorporated enterprise
An NPI. |
| 5.18. | Although it is possible to classify enterprises according to their principal activities using the ISIC and to group them into "industries", some of the resulting "industries" are likely to be very heterogeneous because some enterprises may have several secondary activities which are quite different from their principal activities. In order to obtain groups of producers whose activities are more homogeneous, enterprises have to be partitioned into smaller and more homogeneous units. |
1. Kind-of-activity units
| 5.19. | One way to partition an enterprise is by reference to activities. A unit resulting from such a partitioning is called a kind-of-activity unit, defined as an enterprise, or a part of an enterprise, which engages in only one kind of (non-ancillary) productive activity or in which the principal productive activity accounts for most of the value added. Each enterprise must, by definition, consist of one or more kind-of-activity units. When partitioned into two or more kind-of-activity units, the resulting units must be more homogeneous with respect to output, cost structure and technology of production than the enterprise as a whole. |
2. Local units
| 5.20. | Enterprises often engage in productive activity at more than one location, and for some purposes it may be useful to partition them accordingly. Thus, a local unit is defined as an enterprise, or a part of an enterprise, which engages in productive activity at or from one location. The definition has only one dimension in that it does not refer to the kind of activity that is carried out. Location may be interpreted according to the purpose - narrowly, such as a specific address, or more broadly, such as within a province, state, county, etc. |
3. Establishments
| 5.21. | The establishment combines both the kind-of-activity dimension and the locality dimension. An establishment is defined as an enterprise, or part of an enterprise, that is situated in a single location and in which only a single (non-ancillary) productive activity is carried out or in which the principal productive activity accounts for most of the value added. |
| 5.22. | Although the definition of an establishment allows for the possibility that there may be one or more secondary activities carried out, they should be on a small scale compared with the principal activity. If a secondary activity within an enterprise is as important, or nearly as important, as the principal activity, then that activity should be treated as taking place within a separate establishment from that in which the principal activity takes place. The definition of an establishment does not permit an ancillary activity to constitute an establishment on its own. |
| 5.23. | Thus, establishments are designed to be units which provide data that are more suitable for analyses of production in which the technology of production plays an important role. However, it may still be necessary to transform the resulting data subsequently for purposes of input-output analysis, as explained briefly below in describing the unit of homogeneous production and in more detail in chapter XV. |
| 5.24. | In practice, an establishment may usually be identified with an individual workplace in which a particular kind of productive activity is carried out: an individual farm, mine, quarry, factory, plant, shop, store, construction site, transport depot, airport, garage, bank, office, clinic, etc. It is important to remember, however, that ancillary activities are not separately distinguished and recorded in the System so that repair shops, sales departments, accounts departments, computing departments etc., whose activities are ancillary in nature are not treated as separate establishments. |
The data for establishments
| 5.25. | Establishments are conceptually quite distinct from institutional units. If an institutional unit contains only a single establishment, the two units coincide in the sense that the production account for the establishment is the same as that for the institutional unit. However, an establishment as such is not an institutional unit of the System, engaging in transactions on its own account, incurring liabilities, entering into contracts, and so on. For example, the purchases and sales associated with the productive activities of an establishment are actually made by the institutional unit to which it belongs and not by the establishment itself. It is not possible, therefore, to envisage a complete set of accounts, including balance sheets, being compiled for an establishment, not because of practical data difficulties but because an establishment is not an entity capable of owning goods or assets in its own right or capable of receiving or disbursing income, etc. |
| 5.26. | The only data which can meaningfully be compiled for an establishment relate to its production activities. They include the following:
(a) The items included in the production account and the generation of income account;
(b) Statistics of numbers of employees, types of employees and hours worked;
(c) Estimates of the stock of capital and land used;
(d) Estimates of changes in inventories and gross fixed capital formation undertaken. |
| 5.27. | The compilation of a production account and a generation of income account implies that it must be feasible to calculate output and intermediate consumption and thus value added and also compensation of employees, taxes on production and imports, subsidies and the operating surplus/mixed income. In principle, it must be feasible to collect at least the above kinds of statistics for an establishment, even if they may not always be available, or needed, in practice. |
Application of the principles in specific situations
| 5.28. | The application of the principles given above for partitioning an enterprise into establishments is not always straightforward. This section discusses several situations in which the organization of production is such that the application is particularly difficult. |
Central ancillary activities
| 5.29. | When the production of an enterprise takes place in two or more different establishments, certain ancillary activities may be carried out centrally for the benefit of all the establishments collectively. For example, the purchasing, sales, accounts, computing, maintenance or other departments of an enterprise may all be the responsibility of a head office which is located separately from the establishments in which the principal or secondary activities of the enterprise are carried out. In such a case the entire costs of the central ancillary activities must be distributed over the establishments which they serve, for example in proportion to the latters' outputs or costs, and added to the latters' own costs. |
Establishments within integrated enterprises
| 5.30. | A horizontally integrated enterprise is one in which several different kinds of activities which produce different kinds of goods or services for sale on the market are carried out in parallel with each other. It follows from the definition of an establishment that a separate establishment should normally be identified for each different kind of activity. |
| 5.31. | A vertically integrated enterprise is one in which different stages of production, which are usually carried out by different enterprises, are carried out in succession by different parts of the same enterprise. The output of one stage becomes an input into the next stage, only the output from the final stage being actually sold on the market. There are numerous examples of vertically integrated enterprises. |
| 5.32. | For example, an enterprise may use its own fishing fleet to catch the fish it then processes into frozen or canned food products, i.e., manufactured products. Similarly, an enterprise may have its own plantations on which it grows the tea it then processes and blends into packages of tea for sale to final consumers. A manufacturer of bricks may process clay mined from its own quarries. A striking feature of the examples just given is that the vertical integration extends beyond different stages of manufacturing by integrating fishing, agriculture, or mining with manufacturing. However, vertical integration is also very common within manufacturing, while some types of vertical integration do not involve manufacturing. |
| 5.33. | From an accounting point of view it can be difficult to partition a vertically integrated enterprise into establishments because values have to be imputed for the outputs from the earlier stages of production which are not actually sold on the market and which become intermediate inputs into later stages. Some of these enterprises may record the intra-enterprise deliveries at prices that reflect market values, but others may not. Even if adequate data are available on the costs incurred at each stage of production, it may be difficult to decide what is the appropriate way in which to allocate the operating surplus of the enterprise among the various stages. One possibility is that a uniform rate of profit could be applied to the costs incurred at each stage. |
| 5.34. | Despite the practical difficulties involved in partitioning vertically integrated enterprises into establishments, it is recommended that when a vertically integrated enterprise spans two or more headings at the first level of breakdown of the ISIC, at least one establishment must be distinguished within each heading. The first breakdown of activities in the ISIC corresponds to broad industry groups such as agriculture, fishing, mining and quarrying, manufacturing, etc. |
Establishments owned by general government
| 5.35. | Government units, especially central governments, may be particularly large and complex in terms of the kinds of activities in which they engage. The principles outlined above have to be applied consistently and systematically to government units. The procedures to be followed when dealing with the main kinds of producer units owned by government may be summarized as follows. |
| 5.36. | An unincorporated enterprise owned by government may be a market producer that sells or otherwise disposes of all or most of its output on the market at prices that are economically significant. For example, a municipal swimming pool or a government publishing office may be a market producer. Such an enterprise may be treated as a quasi-corporation if it is independently managed and if its accounts permit its income, saving and capital to be measured separately from government so that flows of income, or capital, between the unit and government can be identified. If it is treated as a quasi-corporation, it ceases to be part of the government sector and is treated with respect to partitioning into establishments in the same way as a publicly owned corporation. Market producers owned by government which are not quasi-corporations should be partitioned into two or more separate establishments if they are engaged in two or more different kinds of activities or if they are situated in two or more different locations. |
| 5.37. | An unincorporated enterprise owned by government may be a non-market producer that supplies output free or at prices that are not economically significant. A distinction needs to be drawn between non-market producers owned by government which deliver final goods or services to the community or to individual households and those which produce goods or services for use by other government units. |
| 5.38. | Non-market producers providing final goods or services - such as public administration, defence, health and education - should be partitioned into establishments using the activity classification given in Divisions 75, 80, 85 and 90 of the ISIC. Agencies of central government may be dispersed over the country as a whole in which case it will be necessary to distinguish different establishments for activities which are carried out in different locations. |
| 5.39. | Non-market producers which supply goods or services to other government agencies or departments should be treated as follows:
(a) When a government agency supplies goods to other government agencies it must be treated as a separate establishment and classified under the appropriate heading of ISIC. This applies to the production of munitions or weapons, printed documents or stationery, roads or other structures, etc. The units must always be identified as separate establishments for two reasons. First, a government which produces its own weapons to supply to its own armed forces is, in effect, a vertically integrated enterprise which spans two or more headings at the first level of ISIC. Therefore, at least one separate establishment must be distinguished in each heading. The same argument applies to a government printing office and other goods producers owned by government. Secondly, except as noted earlier with respect to goods that do not become a physical part of a principal or secondary product, production of goods is not considered ancillary activity. An activity which supplies goods to an establishment producing services should be treated as a separate establishment;
(b) The situation of government agencies supplying supporting services - for example, transport pools and computing departments - to other government agencies is less clear. Normally it will be appropriate to treat them as ancillary activities whose costs are to be distributed over the various establishments which they serve in proportion to the latters' own costs. However, exceptions to this general principle may be envisaged in the case of very large specialized agencies serving central government as a whole - for example, a very large computer or communications agency - which may be so large that it is appropriate to treat it as a separate establishment. |
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