Re-evaluating the ‘smile curve’ in relation to outsourcing industrialization

In this paper, we argue that the widely used concept of the value-added driven ‘smile curve’ in the international business literature, which often illustrates a zero-sum game between interdependent nations in the global supply chain, requires revisiting. In particular, the U-shaped smile curve for the distribution of profitability among partners can be inverted if firms from the developing economies manage to obtain high productivity from their workers and have no high entry costs to the midstream industries that specialize in global supply chains. We construct an economic model and find that the theories proposed in the paper are broadly consistent with the empirical evidence. Our findings have some important implications for the current debate on industrialization strategies with particular reference to outsourcing industrialization for developing countries.