Maryland Smith Research / September 12, 2019

How Do You Build a Company? It Depends on Where You’re From

Video Game Reveals How a Founder’s Home Country Affects a Startup

How Do You Build a Company? It Depends on Where You’re From

When it comes to building a company, it matters where you are from. According to new research from the University of Maryland’s Robert H. Smith School of Business, there is a clear connection between how much hierarchy founders create in their startups and where they hail from. Founders from countries with corrupt governments and fewer freedoms for citizens give their employees much less autonomy. Likewise, founders from more transparent countries give their employees more power and freedom.

Maryland Smith management professor David M. Waguespack worked with Jóhanna K. Birnir, a government and politics professor at the University of Maryland, and Eric Dunford at Georgetown University to study data from an online, role-playing video game where players compete by creating or working for virtual corporations.

The game, EVE Online, was the perfect microcosm for the researchers because it attracts a lot of players worldwide – more than 6.5 million players from 200 countries since it launched in 2003 – and they all operate in the same virtual environment. They looked at all EVE player-run corporations founded from January 2012 through July 2016, which amounted to 310,652 companies with about 1 million “employees” and founders. To start a company in the game, players must recruit new members as employees, and establish clear goals and rules to build their corporation’s assets. The researchers measured autonomy by whether the employee characters has direct access to the company bank account and resources without getting approvals.

The researchers used the Varieties of Democracy, or V-Dem, measure of democracy ratings to score founders’ home countries based on lawfulness of public officials, property rights of citizens, how laws are enforced, and the amount of corruption in government.

“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,” write the researchers.

Then they looked at how founders actually did wield authority in their corporations in the EVE video game and what country they were from. Their 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.

Of the 30 more developed countries Waguespack and his co-authors studied, Germany rated the highest for transparency and predictability of its institutions. And the 26,000 German EVE firms gave more autonomy to employees than firms from any other country. Conversely, Russia rated highest in corruption and lowest in law and liberty, and the 34,000 Russian EVE firms had among the lowest levels of employee autonomy in the game. The pattern held true for the other countries studied.

Though the research doesn’t get into how more autonomy for employees influences firm performance, it does confirm the role that culture plays in organizational structure choices.

The research, published in the journal Strategy Science, is featured in Harvard Business Review, “Where a Founder is From Affects How They Structure Their Company.”


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