Cottage Industry

The cottage industry refers to small manufacturing units producing goods and services using conventional and low-technology methods. An example of the cottage industry is the locally produced handicrafts and textiles, which are still the backbone of many rural economies around the globe.

Members of the household act as labor and materials for such a setup for production are mostly locally sourced. Profits generated from the operations are typically used to meet the household’s expenses.

• The cottage industry is defined as small and mostly family-run enterprises where the profits are majorly used to meet the daily needs of the households. Therefore, it is also known as a small-scale industry.
• Japan, Germany, Italy, etc., boast many successful examples of small-scale industries, with a developing country like India showcasing one of the oldest and widest expansions of such enterprises.
• Although cottage industries are small, their sheer size and sizable economic contribution make them a thriving rural backbone of many economies worldwide.
• Despite facing multiple headwinds from industrialization, digitization, and lately the crippling lockdowns during the Covid-19 pandemic, the industry worldwide has continued to soldier on and, in some cases, grow.

The cottage industry began its journey as a small-scale family venture, and gradually became one of the most fruitful sectors of the market. To understand what is a cottage industry, it is vital to know what led to its emergence long back. Formerly, when most of the world did not live in urban clusters, families were forced to be independent. Often, they had to look out for the production of their food, clothing, and other essentials. So, the family members began to pool their resources to set up a small facility to create their clothes and kitchenware. If they made an amount greater than their consumption, they would sell the excess amount for a profit.

In time, the cottage industry produced various supporting services in trading and logistics. This web of interconnected traders and manufacturers makes them an elixir for rural economies. Hence, the cottage industry acts as a small-scale industry as, in most cases, these setups do not have the scale required for mass production. More features of the cottage industries include being highly fragmented and usually involved in producing goods that require skilled and semi-skilled labor.

The final products trade in the local market or through external agents, or intermediaries in other regions. As a result, countries with low employment in the formal sectors usually witness a strong cottage industrial complex, especially in rural areas.

Let us consider the following cottage industry examples to know its role in the economy:

#1 - Europe

Although we normally associate with developing countries. Many developed economies like Japan, Germany, Italy, etc., which are successful, are examples of the cottage industry. In Europe, family cottage enterprises' legacy was primarily associated with clockwork, straw plating, watchmaking, basket weaving, etc. In Germany, small-scale enterprises are popularly known as Mittelstand companies.

#2 - Japan

Japan, a country that boasts an envious economy and standard of living, is also home to some of the world's oldest family-run cottage enterprises. A shop near an old Kyoto shrine run sells delicacies to pilgrims, among the more notable ones. This family has operated it for more than a thousand years.

#3 - India

The cottage industry in India is one of the oldest and widest in the world. It reflects the country’s diversity through the dynamic and wide-ranging products that the industry churns out into the market.

The top five cottage industries in the nation are leather manufacturing, silk weaving, cotton weaving, small-scale food processing like pickles, meticulously done metal handicrafts, and carpet making.

The leather industry supplies 12.9% of the global leather demand with an annual production of 3 billion square feet of leather. Moreover, the tanning industry generates employment for close to 4 million people, with women accounting for 30% of the labor. The country exports most of these products with the USA, Germany, and the UK accounting for nearly 40% of the total export value.

#4 - Other Countries

Other regions with a significantly visible cottage entrepreneurship culture include South East Asia, the Middle East, the US, and countries in South America.

Some economists have argued that countries with strong manufacturing capabilities like Germany and Japan tend to have a strong family-run enterprise culture. Others have even further claimed that these small family firms’ success created the industrialized economies of many developed nations that we can see today.

The small-scale industry adds to the economy; numerous problems also plague it. Some of the major issues are provided below:

#1 - Migration of Skilled Labor toward Cities

Since the boom of cities post-industrialization, many rural cottage industries have witnessed a significant reduction in their available talent pool due to the brain drain of skilled and semi-skilled labor searching for better opportunities.

#2 - Competition from Industrial Houses

Under their scale, cottage industries face severe limitations when it comes to capitalizing on economies of scale and face high input costs. As a result, it is not uncommon for many cottage entrepreneurs to operate their businesses with razor-thin margins. That does not bode well when a large company moves into the neighborhood and begins to mass-produce the same goods at lower prices.

#3 - Inefficient Logistics and Sub-par Banking Services

Being in the countryside usually comes with the advantages of low setup costs, but this is a double-edged sword in reality. In developing countries where the road network is patchy and not properly maintained, delivering goods to buy houses is a logistical nightmare. Furthermore, these small-scale business owners do not usually have easy access to cheap credit that their larger competitors often enjoy. That is one area where size does matter!

#4 - Market-Cornering and Predatory Practices by Middlemen

When you are a small manufacturer who spent most of your life in a village, setting up a business is impossible unless you have a steady buyer. Finally, after a long search spanning many weeks, you may find a buyer willing to purchase your entire production capacity. But there is a catch; the buyer will only pay a price that covers the cost of running your business. So, what would you do in such a situation?

Unfortunately, this is the reality of countless small-scale businesses every day. Their fragmented nature works against them since there are only a few buyers but multiple producers and manufacturers.

#5 -Digitization

Since most small-scale cottage enterprises are not tech-driven, they could not capitalize on the opportunities of the e-commerce and online markets. Moreover, with consumer shopping habits favoring online sales, many small enterprises were forced to see dwindling sales and close shops.

However, in recent years new-age cottage entrepreneurs have been upskilling themselves and their business practices to sell online and drive better efficiencies into their businesses.

This article has been a guide to what is a Cottage Industry and its definition. Here, we discuss how it works along with examples (India, Europe, Japan) and problems. You can learn more from the following articles: -

• Economic Equilibrium
• Economies of Scale
• Cyclical Industry
• Terms of Trade