Hegemonic theories of Third World regional development maintain that growth in rural small-scale industries can originate in growth linkages from modernized agriculture or in entrepreneurship development within the non-farm sector with growth linkages to export-oriented industries. In this context, the article discusses whether small-scale industries in Hambantota District, Sri Lanka are experiencing a dynamic growth or are constrained by structural conditions leading to pauperization. A survey of small-scale industries in Hambantota District reveals that market conditions are crucial in facilitating or limiting growth in local small-scale industries. A division exists between industries operating solely in local markets and industries selling some of their products in non-local markets. The latter group consist of traditional activities that have been reactivated through subcontracting. The former group of industries are integrated in the larger economy through market competition with non-local goods and through class-specific consumption linkages. Certain industries within this group are reproduced at a low level of productivity by producing cheap goods for low-income peasant and wage-labor households. On the other hand, improved social conditions and numerical growth of households employed in the service sector create limited growth in other industries. Consequently, it is argued that growth of rural small-scale industries is not primarily a matter of internal constraints but is contingent on their position in larger political and economic structures. In the specific case of Hambantota District, the dominant process experienced by small-scale industries at the moment is more accurately described as preservation than dynamic growth.