A systems-based approach to industry classification

I propose an alternative approach to industry classification that reflects the way in which firms self-organize into industries and sectors. The systems-based approach to industry classification takes the sector as the primary unit of analysis, defines a sector on the basis of similarity in needs to which firms collectively respond, and disaggregates sectors into subsectors and industries on the basis of recursive hierarchical dependency. The result is an approach to industry classification that reflects industry structure, reduces egregious cases of between-class homogeneity and within-class heterogeneity, and accommodates changes in technology. The approach is illustrated in a communications equipment subsector application.