What Is a Cottage Industry? Significance in Developing Economies

What Is a Cottage Industry?

A cottage industry is a small manufacturing business that's owned and operated by an individual or a family, typically operating out of a home rather than a purpose-built facility.

Cottage industries are defined by the small amount of investment that's required to start one. They often focus on producing labor-intensive goods but they can face a significant disadvantage when competing with factory-based manufacturers of mass-produced goods.

How Cottage Industries Work

The first cottage industries in the U.S. and Europe were light manufacturing operations that engaged in subcontracted work including garment-making, textiles, sewing, shoemaking, and small metal machine parts.

These cottage industries produced finished goods using raw materials supplied by the contract provider in many cases. Many contemporary industries that operate in factories in the developed world replaced cottage industries that thrived before the Industrial Revolution.

Modern cottage industries serve a consumer market that seeks original, handcrafted products as an alternative to mass-produced, name-brand products. These can include anything from clothing items to crafts or decorative home furnishings.

Cottage Industries in Developing Countries

Cottage industries play a significant role in the economies of developing countries. They require very small investments to get off the ground.

Developing nations have comparative advantages in creating successful cottage industries. Their lower cost of living makes it feasible to produce labor-intensive goods at competitive prices, allowing a small business to make a sufficient profit.

Some cottage industries grow over time and employ others in the community. Their products tend to be handcrafted using traditional tools and machinery so their productivity is unlikely to rival the sheer volume of the products of mass manufacturing.

Cottage industries are also an important source of supplemental income in rural areas. Some farmers turn to their cottage industries to produce income when the growing season ends. A cottage industry in a village can grow over time as residents come together to produce crafts for sale in local markets or even for export abroad.

Advantages and Disadvantages of Cottage Industries

Cottage industries can thrive if their operators are content to remain small producers in niche markets, working for the benefit of a single family. Business growth is possible but there are significant barriers.

Advantages

A cottage industry can be created with minimal startup costs by a single individual with a skill that's valued.

Only basic infrastructure is necessary. The business operator needs a way to receive orders, get supplies delivered, and get the end products to the buyers. Mobile technology has greatly improved the ability of cottage industries to operate.

Cottage industries are creating opportunities for people in remote rural areas to improve their living standards even in modern times.

Disadvantages

Cottage industries must compete with larger producers with deeper pockets. This may require them to adopt new technologies that improve productivity.

They must also compete for labor if they grow. This can be increasingly difficult as a country becomes more developed and wages increase.

Example of a Cottage Industry

Niche markets that don't appeal to big producers can be an ideal fit for cottage industries.

Competitive dancers, figure skaters, and other performers often wear original, handmade costumes. Parents might make costumes for their children at the lowest levels of youth competition. The demand for costumes of higher quality grows as performers rise to higher levels of competition, creating opportunities for the most highly skilled costume designers to fill the demand.

Designers who began by creating costumes for their children and maybe a few others can end up creating a cottage industry for themselves.

The Bottom Line

Cottage industries thrived in the pre-industrial ages when people in remote areas were able to make a living, though hardly an easy one, by creating labor-intensive products for larger businesses.

They appear to be thriving in modern times as well as niche businesses pop up in homes all over the world to serve the demand for high-quality hand craftsmanship.