Cottage industry is such an industry which is established locally and small industry is such an industry which is dependent on locally available raw material.
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.