In a rational world, a founder would tailor a firm’s organizational structure to the particular challenges that it faced, but our research suggests that founders rarely select organizational structures that best suit their business needs. Instead they build companies around the the nature of the market and political institutions in their country of origin, regardless of where their company is actually based. And the arbitrariness of this important decision may well have negative consequences for many new firms.
Where a person is born can shape the languages they speak, their life expectancy, and even how much they talk with their hands or smile. But how does it affect how they build a company? Does someone from South Africa have an entirely different approach than someone from Russia? It turns out that in some cases, they do.
In our recent research into how founders around the world distribute authority, we identified a connection between how institutionally transparent a country is and how much hierarchy founders create in their firms; the more transparent a country was, the more autonomy founders gave employees, but as transparency decreased, so did employee autonomy.
We based our study on a vast dataset from EVE Online, an online role-playing game developed by Iceland-based CCP Games in 2003. The game is player-driven, and players compete for dominance by establishing — or working for — virtual corporations. To start a corporation, a founder must recruit new members and set up clear goals and rules in order to build up the corporation’s assets. Since the game’s inception, over 6.5 million players from about 200 nations have participated. Beyond sheer data, one key advantage of conducting a cross-national study like this in a video game is that each player, regardless of their physical location, operates in an identical virtual environment. Thus we can disentangle, for instance, the effect of being Japanese from operating in Japan.
Our sample consisted of all EVE player-run corporations that were founded from January of 2012 to July of 2016. We studied 310,652 player-run companies, representing about a million “employees,” using database records to see whether the character had direct access rights to the company wallet (bank account) and resource stocks (spaceships, bases, equipment, etc.). We used this — the employee’s ability to make resource allocation decisions without getting someone else’s approval — as a measure of “autonomy.”
The “companies” in our study were categorized according to the founder’s real world residence determined by their internet protocol address. In all, these founders came from 124 countries, each of which we scored according to the predictability and transparency of its major institutions. This ranking was based on ratings by experts from the Varieties of Democracy project of four key factors — (1) public administration (the extent to which its public officials abide by the law); (2) property rights (the extent to which its citizens enjoy the right to private property); (3) law and liberty (the extent to which its laws are rigorously enforced); and (4) corruption (the extent to which its public sector employees grant favors in exchange for bribes). When combined, these four factors give a good indication of the transparency and predictability of a country’s institutions — the extent to which the law is fully respected by public officials and arbitrary administration is rare. According to our model, this indicator of institutional stability offers a template for how someone raised in that country might wield authority. We then correlated these factors about a given country with the extent to which founders from that country gave employees in EVE corporations the right to make autonomous decisions.
Our results showed that founders from countries where institutions are more transparent and the law is more predictably enforced tended to give more autonomy to employees. For example, of 30 countries we studied, Germany rated highest in the transparency and predictability of its institutions. And the 26,000 German EVE firms tended to give more autonomy to employees than firms from any other country. Of the top 30 countries appearing in EVE, Russia rated highest in corruption, and lowest in law and liberty. And the 34,000 Russian EVE firms have among the lowest levels of employee autonomy in the game. Other nations fit this pattern. Switzerland, Australia, and Japan all score relatively highly on both institutional quality and employee autonomy. Conversely, China, Belarus, and Italy score relatively lower on both factors.
Overall these results are consistent with research finding that country of origin influences the work behavior of second generation immigrants and the organization of multinational corporations’ local plants, but are a more direct test of the role that culture plays in economic choices. One caveat is that our findings do not (yet) directly speak to the question of how autonomy decisions influence average performance. Still, we argue that it is critical that founders understand that their organizational structure choices may have a substantial arbitrary component. If changing an organizational structure in midstream is not easy than new firms may run into problems as they grow or their competitive environment changes. There is a long literature in organizational theory documenting how young firms that have consistent ways of doing things have better survival rates; but this very consistency means that these firms are often unable to change in response to new challenges.
Likewise, charismatic founders are often tied to one particular management style — the same one that led to their initial success. While our empirical work does not yet offer concrete solutions to this complicated management problem, it helps explain the dilemmas that some promising young companies may encounter.
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