Meaning of Cottage Industry
Cottage Industry refers to small manufacturing units involved in the production of goods and services using conventional and low-technology methods. An example of cottage industry is the locally produced handicrafts and textiles, which are still the backbone of many rural economies around the globe.
The labor for such a setup is usually provided by members of the household and materials for production are mostly locally sourced. Profits generated from the operations are usually used for meeting the expenses of the household.
- Cottage industry is defined as the small and mostly family-run enterprises where the profits are mostly used to meet the daily needs of the households. It is also known as small scale industries.
- Japan, Germany, Italy, etc. boast of many thriving examples of the 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 scale, 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 from the crippling lockdowns during the Covid-19 pandemic, the industry worldwide has continued to soldier on and in some cases grow.
How Does Cottage Industry Work?
Back in the day, 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 own food, clothing, and other essentials. So, the family members began to pool their resources to set up a small facility to create their own clothes and kitchenware. If they made an amount greater than their own consumption, the excess amount would be sold for a profit.
As time went by, the cottage industry gave birth to various supporting services in trading and logistics. It is this web of interconnected traders and manufacturers that make them an elixir for rural economies. Hence, the cottage industry is usually classified as a small-scale industry since 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 both skilled and semi-skilled labor.
In most cases, the final products are sold to the local market, external agents or middlemen who sell them in other regions. Countries with low employment in the formal sectors usually witness a strong cottage industrial complex, especially in rural regions.
Cottage Industry Examples
We will take you through some examples from around the globe.
Although we normally associate them with the developing countries, there are many developed economies like Japan, Germany, Italy, etc., which thriving examples of the cottage industry. In parts of 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.
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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. Among the more notable ones, there is a shop near an old Kyoto shrine run that sells delicacies to pilgrims. The same family has run it for more than a thousand years.
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 gone further and claimed that these small family firms’ success created the industrialized economies of many developed nations that we see today.
Cottage Industry in India
- India has one of the oldest and widest penetrations of cottage industries in the world. The diversity of the country is also reflected in the dynamic and wide-ranging products that the industry churns out into the market.
- In India, the top five cottage industries are leather manufacturing, silk weaving, cotton weaving, small scale food processing like pickles, meticulously done metal handicrafts, and carpet making.
- The cottage industries in India have witnessed in-depth analysis time and again to comprehend their features. They have found out in the process that the leather industry supplies 12.9% of the global leather demand with an annual production of 3bn square feet of leather. The tanning industry generates employment for close to 4mn people, with women accounting for 30% of the labor.
- Most of the finished products are exported globally with the USA, Germany, and UK accounting for close to 40% of total export value. The major leather producing states include West Bengal, Uttar Pradesh, Haryana, and Tamil Nadu.
- The cotton weaving and textiles industry in India dates back to historical times. The textile industry is also the second-largest employer in India after agriculture. It accounts for 51mn direct jobs and contributes almost 5% to India’s GDP. Karnataka, Telangana, Maharashtra, and Gujarat are some of the major cotton-producing states of India.
- The silk weaving industry largely caters to the demand during the wedding and festival seasons when people prefer to wear silk clothing. 70% of India’s silk weaving is based in Karnataka with major types being Mulberry, Eri, and Muga.
- Metal handicrafts and carpet-making industry are specialized industries that require a lot of semi-skilled and skilled labor. In addition to this, these two industries also have an ethnic touch of the regions where they have historically dominated the economic scene.
- To sum it up, the small-scale manufacturing industry has had a stronghold in the rural Indian economy. They don’t just provide a good amount of employment but also bring in a good chunk of foreign exchange.
What Are the Problems Faced by Them?
Regardless of the value, the small scale industry adds to the economy; numerous problems also plague it. Some of the major ones are provided below.
#1 – Migration of Skilled Labor towards 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
By virtue of their scale, cottage industries are severely limited by their inability to capitalize on economies of scale and face high input costs. It is not uncommon for many cottage entrepreneurs to operate their businesses with razor-thin margins. This doesn’t 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 advantages of low setup costs, but in reality, this is a double-edged sword. In developing countries where the road network is patchy and not properly maintained, delivering goods to buying 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. This is one area where size does actually matter!
#4 – Market-Cornering and Predatory Practices by Middlemen
When you are a small manufacturer who has spent most of his life in a village, setting up a business is impossible unless you have a steady buyer. After a long search spanning many weeks, you may finally find a buyer who is willing to buy your entire production capacity. But, there is a catch; the buyer will only pay a price that covers the cost of running your business. What would you do in such a situation?
Unfortunately, this is the reality encountered by countless small scale businesses every day. Their fragmented nature works against them since there are only a few buyers but multiple producers and manufacturers.
Since most small-scale cottage enterprises are not tech-driven, they could not capitalize on the opportunities of the e-commerce and online markets. With consumer shopping habits that favor online sales, many small enterprises have been forced to see dwindling sales and close shop.
However, in recent years the 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 does it work along with examples (India, Europe, Japan) and problems. You can learn more from the following articles –