How are horizontally integrated activities treated?

Horizontal integration occurs when activities are carried out simultaneously using the same factors of production. Paragraph 86 of the introductory guidelines states the treatment. The principle of value added has to be applied, following the top down method, with the same precautions for substitutes. The treatment is statistical only, described here in the abstract, and it does not determine a code for a specific reader.

What is horizontal integration in the manual?

Paragraph 86 defines horizontal integration by simultaneity and shared factors. The activities are carried out at the same time, using the same factors of production, and it would often be impossible to separate them statistically into different processes, assign them to different units, or provide separate data for them. Nor would the principle of value added normally be applicable in a direct way, because the shared factors cannot be divided between the activities from the available data. The manual gives the example, in paragraph 78, of a unit carrying out both wholesale and retail trade, as a case of horizontal integration. The example is general: two outward facing activities sharing the same premises, staff and stock.

The definition contrasts with vertical integration, where stages follow in succession and the output of one stage feeds the next. In horizontal integration there is no chain. The activities sit side by side, and the difficulty is separation, not sequence. Paragraph 78 groups vertical integration, horizontal integration and any combination of activities that cannot be separated within a statistical unit together, as the cases where the rules in the following paragraphs apply. The grouping is a reminder that the top down method and the substitute rules are the shared tools for all three cases, with one difference of emphasis for horizontal integration, set out below.

Which substitute does the manual favour here?

Paragraph 86 states that, in general, in the case of horizontally integrated activities, gross output or turnover might be the most appropriate value added substitutes to be used for determining the principal activity, following the top down method. The word might matters. The manual does not state that turnover is always the right substitute. It states that, where separation is impossible and value added cannot be applied directly, an output based measure is generally the most appropriate proxy. The same precautions for using substitutes in paragraphs 72 to 77 still apply, including the warning that turnover and value added are not proportional across activities, and the warning about trade margins in paragraph 76.

The manual also states a mitigating fact. Integrated activities are in many cases included in the same class even though their outputs have quite different characteristics. Where the classification itself groups the integrated activities together, the separation problem does not arise at class level, because the unit’s activities fall inside one class already. The substitute question then matters only at a higher level, or not at all. A reader should therefore check the explanatory note for the class concerned before assuming that a separation problem exists. The note may already resolve it.

How does the treatment compare with vertical integration?

| Feature | Vertical integration, paragraphs 83 to 85 | Horizontal integration, paragraph 86 |

|---|---|

| Pattern | Stages in succession, output feeds next stage | Activities simultaneously, same factors of production |

| Principal activity rule | Largest value added share, top down method | Value added principle, top down method |

| Favoured substitute where value added is missing | Comparisons with similar units, market prices | Gross output or turnover, in general |

| Mitigation | Default assignments where shares remain impossible | Activities often grouped in the same class |

The table compares the two paragraphs directly. The principal activity rule is the same in both columns. The difference lies in the measurement difficulty and the favoured proxy. The comparison is presented in the abstract, as the manual presents it. It does not apply the rules to a specific unit, and the institute or register that holds a unit’s record decides which treatment fits the unit’s data.

What does this classification not decide?

No part of the method described in this guide picks a code for a specific business. The guidelines describe how statistical units are classified in principle, using value added and the steps set out below. A particular unit application needs its own figures and the judgement of the statistical office that holds the register entry. The guide states the method in the abstract, as the task for this cluster requires. This does not work through a real business, and it does not invite applying the steps to a real business without the institute. That restraint is deliberate, and it is part of the method’s own presentation in the manual.

Where is the entry confirmed?

Confirmation follows the same sequence in every guide in this cluster. First the introductory guidelines paragraphs stating the rule, then the explanatory note for the category concerned, and finally confirmation of the entry with the national statistical institute or business register holding the record for the unit concerned.

Note the shared factors and the separation difficulty, use gross output or turnover only with the substitute cautions, and confirm the treatment with the institute or register that holds the record.