Before we understand why firms behave differently or grow at different rates, we need a way to describe them. Economists classify firms using three main criteria: the economic sector they operate in, whether they are publicly or privately owned, and their relative size. This classification helps us compare firms and make predictions about their likely objectives and strategies.
Every firm in the world operates in one of three economic sectors, depending on what it does with raw materials and labour:
Primary Sector
Firms involved in extracting or producing raw materials from the earth. Think: fishing, farming, mining, forestry, oil drilling. These firms work directly with nature. A good example is Tata Steel, which extracts iron ore and turns it into steel.
Secondary Sector
Firms that take raw materials and manufacture them into finished goods. They transform primary sector output. Car manufacturing, food processing, textiles, electronics assembly. A good example is Kellogg's, which takes raw grain and manufactures breakfast cereals.
Tertiary Sector
Firms that provide services rather than physical goods. Banking, education, tourism, retail, transport, healthcare. A good example is Expedia, which provides travel booking services.
Why Does This Matter for Exams?
Governments measure how developed an economy is by looking at the proportion of workers and GDP in each sector. Developed economies have more tertiary sector activity; developing economies still rely heavily on primary sector.
Two Key Metrics:
- % of workers employed in each sector: In 2019, 84% of Singapore's workers were in the tertiary sector — a sign of a highly developed economy.
- % of GDP generated by each sector: In 2021, 38% of Ethiopia's GDP came from primary sector activity — a sign of a developing economy still dependent on agriculture.
The second way to classify firms is by who owns and controls them:
Public Sector Firms
Owned and controlled by the government. Their primary goal is usually to provide a service to the public, not to maximise profit. They can operate at local level (e.g., Transport for London), regional level (e.g., Agricultural State Service in India), or national level (e.g., Caribbean Airlines).