The film is based on Ray Nelson's 1963 short story 'Eight O'Clock in the Morning', and Carpenter also acquired the rights to a 1986 comic adaptation titled 'Nada' illustrated by Bill Wray.

Carpenter wrote the screenplay under the pseudonym 'Frank Armitage', a reference to H.P. Lovecraft's character Henry Armitage from 'The Dunwich Horror', reflecting Carpenter's admiration for Lovecraft's concept of a hidden world underneath reality.

Carpenter has said the film's political commentary was driven by his dissatisfaction with Ronald Reagan's economic policies and the increasing commercialization of pop culture and politics in the 1980s.

Carpenter cast professional wrestler Roddy Piper after meeting him at WrestleMania III in 1987, believing his rough, lived-in appearance made him perfect for the everyman role of Nada.

Carpenter wrote the role of Frank specifically for Keith David after being impressed by his performance in The Thing, wanting a co-lead who wouldn't just be a traditional sidekick.

The film was shot in eight weeks during March and April 1988 on a budget of about $4 million, largely on location in downtown Los Angeles, and real homeless people were hired as extras for the shantytown scenes, paid in food and wages.

The opening train sequence cost $12,000 to film, and a technical problem forced the crew to reshoot it entirely at the same cost.

The famous five-and-a-half-minute alley fight between Nada and Frank was only described in the script as 'They fight,' leaving choreography to the actors and stunt coordinator; it took a month to plan and three days to shoot, and was inspired by the brawl between John Wayne and Victor McLaglen in The Quiet Man (1952).

Nada's iconic line 'I have come here to chew bubble gum and kick ass. And I'm all out of bubble gum' was improvised by Roddy Piper on set and is considered the film's most famous quote.

Street artist Shepard Fairey credited They Live as a major inspiration for his 'Obey' campaign and Andre the Giant Has a Posse project, citing the film's message about commercialism and manipulation through advertising.

The 2012 documentary The Pervert's Guide to Ideology by philosopher Slavoj Žižek opens with an analysis of They Live, using its sunglasses concept to explain ideology critique.