Sir Paul joins the likes of Bob Dylan and Sir Paul McCartney in becoming an officer of the LÃ©gion d'honneur, or Legion of Honour.
French Ambassador to the UK, Sylvie Bermann, presented him with a medal at a ceremony in London.
The Nottingham-born designer said he was "thrilled".
"It feels very special because I've had a strong relationship with Paris especially, but with France for about 40 years now," he said in a video on the Embassy of France in the UK YouTube channel:
"I've had 80 fashion shows in Paris and I've got five shops so to have this honour is really lovely, very special."
The designer's first shop, which opened in Nottingham in 1970, had a French name "VÃªtements pour Hommes", meaning men's clothes.
Mr Smith held his first fashion show in Paris in 1976 and has shown each new collection in the capital since then.
Sylvie Bermann described him as a "revolutionary figure in British design" who had "left an indelible mark on French fashion".
"I am thrilled that this uniquely talented man chose to make France a focal point for his creativity and entrepreneurship," she said.
"He is an inspiration to a whole generation of young designers on both sides of the Channel."
The Legion of Honour was created by Napoleon Bonaparte in 1802, and officer is the second highest of five ranks.
British designer Paul Smith has been awarded one of the highest honours in France in recognition of his career-long ties with the country.