Re-Evaluating the ‘Smile Curve’ in Relation to Outsourcing Industrialization

Developing countries have devised various industrialization strategies since the first wave of globalization in the 19th century. Now that the whole world trade system has entered the era of global supply chains, the second wave of globalization is beginning. This second wave, supported by global supply chains, provides opportunities for developing nations to engage in what we call ‘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 establish 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 for developing countries