Cottage Industry

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.

Key Takeaways

  • A cottage industry is a small manufacturing operation, often run out of a person's home.
  • Cottage industries play a significant role in the economies of developing countries.
  • Small-scale cottage industries also are an important source of employment, especially in rural areas.

How Cottage Industries Work

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.

Many modern cottage industries serve a market that seeks out original, handcrafted products as opposed to mass-produced, name brand products. These can include anything from clothing items to crafts to decorative home furnishings.

Special Considerations

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.

Developing countries also are 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 also are 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. 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 also will have to compete for sources of labor, which can be especially difficult as a country becomes more developed and wages rise.

Many flea markets or farmers markets often have people selling crafts or other goods that are the products of cottage industries.

Example of a Cottage Industry

Competitive dancers, figure skaters, and other similar performers often wear original, handmade costumes. At the lowest levels of youth competition, parents might make costumes for their children. As performers rise to higher levels of competition, however, the demand for costumes of higher quality grows, creating opportunities for the most highly skilled costume designers to fill those demands. If skilled enough, designers who began by creating costumes for their own children and maybe a few others can end up creating a cottage industry for themselves.

Designers who have costumes worn by top competitors in the sport can see increased demand for their original creations. Even at regional levels in these sports, there are designers who create names for themselves with their costumes and can be very successful within such a niche market.

Take the Next Step to Invest
The offers that appear in this table are from partnerships from which Investopedia receives compensation. This compensation may impact how and where listings appear. Investopedia does not include all offers available in the marketplace.