What is a 'Cottage Industry'

A cottage industry is a small-scale, decentralized manufacturing business often operated out of a home rather than a purpose-built facility. Cottage industries are defined by the amount of investment required to start, as well as the number of people employed. They often focus on the production of labor-intensive goods but face a significant disadvantage when competing with factory-based manufacturers that mass-produce goods.

BREAKING DOWN 'Cottage Industry'

The first cottage industries were light manufacturing operations in England and the United States engaged in subcontracted garment-making, textiles or sewing, as well as shoemaking and small metal machine parts. They may have been made up of family members engaged in producing finished goods by utilizing raw materials supplied by a business manager. Many contemporary industries that currently operate in factories were once cottage industries before the Industrial Revolution.

Cottage Industry and Developing Economies

Cottage industries play a significant role in the economies of developing countries. These economies may lack the capital and financial systems to support larger industries. It may be difficult for smaller firms to grow due to a lack of available capital or because of uncertainty relating to private property and legal rights. Cottage industry is still seen in Asia, India and South America.

Developing countries are also more likely to have a comparative advantage in the use of labor compared to the use of capital, allowing them to produce labor-intensive goods more cheaply than developed countries. Because cottage industries may employ labor methods that are heavily reliant on traditional tools and machinery or which require the use of hands, they are more likely to see lower productivity. Thus, even though they may employ a large portion of the population they may not produce a proportional amount of output.

Small-scale cottage industries are also an important source of employment, especially in rural areas. For farmers, operating a cottage industry out of the home can supplement the income raised from selling crops. And in winter, when farming activities tend to abate, a cottage industry can create extra income. For small villages, a cottage industry can allow local residents to come together to produce crafts for sale in local markets or even for export to larger cities and other countries.

While companies operating in cottage industries may remain small, they still have to compete with other firms, whether other cottage industries or larger-scale companies. This requires them to employ new technologies that will improve efficiency and productivity. They will also have to compete for sources of labor, which can be especially difficult as a country becomes more developed and wages rise.

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