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

51 Pages Posted: 4 Dec 2016 Last revised: 25 Aug 2019

See all articles by Jim Huangnan Shen

Jim Huangnan Shen

University of London, School of Oriental and African Studies (SOAS), Economics; Center for International Development, Harvard Kennedy School, Harvard University

Sarah Tang

Department of Economics, Suffolk University

Kent Deng

London School of Economics & Political Science (LSE) - Department of Economic History

Date Written: December 1, 2016

Abstract

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.

Keywords: industrialization strategies, smile curve, labour productivity, entry cost, economic development

JEL Classification: F12, F23, F60, L14

Suggested Citation

Shen, Jim Huangnan and Tang, Sarah and Deng, Kent, Re-Evaluating the ‘Smile Curve’ in Relation to Outsourcing Industrialization (December 1, 2016). Available at SSRN: https://ssrn.com/abstract=2878762 or http://dx.doi.org/10.2139/ssrn.2878762

Jim Huangnan Shen (Contact Author)

University of London, School of Oriental and African Studies (SOAS), Economics ( email )

London, WC1E 7HU
United Kingdom

Center for International Development, Harvard Kennedy School, Harvard University ( email )

One Eliot Street Building
79 JFK Street
Cambridge, MA 02138
United States

Sarah Tang

Department of Economics, Suffolk University ( email )

Boston, MA 02108
United States

HOME PAGE: http://https://sites.google.com/site/sarahletang0610/

Kent Deng

London School of Economics & Political Science (LSE) - Department of Economic History ( email )

Houghton Street
London WC2A 2AE
United Kingdom

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