Coordination Costs and the Emergence of Hierarchy in Young Firms

Abstract

We have long known that organizational design choices have a significant impact on a firm’s processes and performance. However, most knowledge about organizational structure comes from settings with static or already established structures. We propose and find evidence that coordination costs influence the development of organizational structure. Using a dataset of employees in all new Brazilian firms from 2003 to 2014, we find that factors associated with a greater need for coordination and with a lesser ability to coordinate amongst the founding team are associated with a greater likelihood of adopting a formal structure. These results contribute to our understanding of the role of organizational structure in coordinating knowledge and highlight one mechanism by which founding conditions influence a young firm’s evolution and capabilities.

Keywords: organizational structure; hierarchy; coordination; founder characteristics; new ventures