How do they go about creating open-ended worlds

[Captain Maxx Power]

Arena is a ridiculously enormous game. The reason for that is that all of the terrain and cities/towns are procedurally generated. Since disk space was a huge factor back then, this meant they would be able to include a huge world at low cost. As far as countries go, I don't know. I didn't play long enough.

While Arena does allow you to visit every location in the Elder Scrolls world, Daggerfall is actually the largest in terms of sheer size. I believe it was estimated to be in excess of the size of the UK, which is over 94000+ square miles.