A crooked ‘smile curve’? Reassessing the relationship between foreign direct investment and development

In the last decades, non-OECD (Organisation for Economic Co-operation and Development) low- and middle-income countries increased their participation in global value chains (GVCs) by attracting foreign direct investment (FDI). According to the ‘smile curve’ hypothesis, most value adding functions along the GVCs correspond to pre-production and post-production tasks. We use a multilevel fixed effects estimator to assess the relationship between georeferenced FDI and economic development, proxied by nightlight emissions, at an unprecedented level of spatial detail (almost 30,000 subnational units of developing countries). We find that this relationship is positive and significant not only when knowledge intensive tasks are considered, but also for production activities, while it is negative when sales and logistic tasks are considered.