In this blog post, we’ll explore how appropriate the traditional industry classification system is as technology evolves and markets change, and discuss the need for a more flexible approach to reflect new industries.
Early on, economist John Bates Clark categorized industries into primary, secondary, and tertiary industries based on whether they extracted raw materials from nature, processed those raw materials, or distributed the processed materials. His classification of industries was an innovative approach at the time and made a significant contribution to understanding industrial structure. However, over time, industries have arisen that cannot be explained in this way.
For example, where does the information and communications industry, which includes both manufacturing and services, belong? The information and communications industry has a unique character that goes beyond traditional industry classifications. As technology advances and the structure of the industry changes, new classification criteria are needed, and in fact, there are various classification criteria depending on the perspective and purpose of the industry.
First, there is the standard industrial classification established by the government. This classification is based on how similar the characteristics of the goods or services are from the consumer’s point of view, and how similar the physical composition of the inputs or outputs and the processing steps are from the producer’s point of view. The set of products or services categorized by this criterion is defined as the same industry. This classification method, which has five levels, including large, medium, and small, is used primarily for statistical purposes. It does not include information to determine the technology level of each industry.
A typical classification scheme based on technology level is the OECD’s criteria, which considers industries with high R&D investment to be high-tech industries. Another measure of technology level is R&D intensity, which is defined as the ratio of a company’s R&D investment to its total revenue. If the average is 4% or higher, the industry is classified as high-tech. This method is useful because it provides an objective definition of high-tech industries. However, because it’s based on industry averages, an industry may be high-tech as a whole but have any number of low-tech companies within it.
Also, new technology areas may emerge as a result of technological advances. These emerging technology areas often form into new industries due to the need for rapid commercialization. For example, the information technology industry, which originated from information technology, has already become a core industry, while biotechnology, nanotechnology, and environmental technology are also emerging as promising industries in the future.
In addition to technology, industry shifts can also be driven by market demand. For example, changing demographics and consumption values have led to the emergence of many new industries that are not bound by the stereotypes of the past. The fashion industry, silver industry, leisure industry, etc. are not listed in the standard industry classification, but in reality, they are already recognized as important industries.
Given these trends, it is likely that the way we define and categorize industries in the future will be more flexible and practical than fixed criteria or systems. This is because new industries will become increasingly important that cannot be captured in the same way, and as technological innovation accelerates and the demographics of the population with purchasing power change, new industries will emerge and old industries will disappear. The definition and categorization of industries will need to be flexible and strategic.
