Across Asia, digital regulations are mitigating risks affiliated with emerging technologies like artificial intelligence (AI), safeguarding data, and strengthening cybersecurity.
However, a new study by Oxford Economics, commissioned by Digital Prosperity Asia, found that these regulations are also driving up compliance costs and diverting key resources away from innovation, with younger startups bearing the brunt of these pressures.
The research, which combined a survey of 1,550 ecosystem participants, expert interviews, and quantitative modeling across India, Malaysia, and South Korea, reveals the key channels through which digital regulation influences startups, emphasizing compliance costs, innovation, and trust effects.
The burden of compliance
Across the three countries studied, 88% of startups report that complying with digital regulations imposes operational constraints, with 28% describing these effects as major or severe, and 74% reporting an increase in compliance-related costs.
This financial burden is substantial, with 71% of startups spending at least 5% of their operating costs on complying with such regulations, and among these, 42% allocating over 15% of their budget to these activities.
Compliance is also driving deep structural changes, requiring startups to reorganize their operations. 72% have already taken steps to strengthen internal compliance processes, including building new compliance processes (57%), transitioning to compliant cloud infrastructure (44%), and seeking legal advisory services (36%).
These obligations aren’t limited to technology investments and require organizations to embed compliance as an ongoing specialized function rather than a one-time adjustment. Startups identified internal spending on compliance-related talent as the largest component of these costs on average (43%), followed by expenditure on external legal and advisory services (25%).
When asked to identify their greatest digital regulatory concern, 38% of respondents cited data governance, followed by AI regulations, ranked second at 26%, and cybersecurity, ranked third at 23%.
Impact on costs, talent retention, innovation
Delving deeper into the impact of digital regulations, the study found that 90% of startups are seeing an impact on workforce costs or management. In particular, 64% of the startups report higher human capital costs, particularly for expertise in cybersecurity, compliance, and data governance, and 47% agree that attracting and retaining local expertise has become more challenging as competition for talent intensifies.
These cost pressures disproportionately affect younger ventures. 77% of no- or pre- revenue startups experience such strains, compared with 58% of startups with over US$50 million in annual revenue.
Beyond costs, digital regulations also introduce frictions into the innovation process as financial resources get reallocated away from research and development (R&D), slowing innovation cycles. 83% of startups report some impact on innovation activity, with 66% shifting funds towards compliance-related activities. This trend is corroborated by ecosystem stakeholders with 65% of venture capital (VC) firms and 68% of incubators confirming that digital regulations divert startups’ financial resources away from innovation.
This diversion of resources is accompanied by delays in product development and longer time to-market. 56% of startups report observing this effect, while a similar share of VCs, 59%, also agree that innovation momentum slows with longer time-to market for new product innovations and upgrades.
These effects on innovation are more pronounced among younger startups, which typically operate with leaner teams and limited financial buffers, making them more vulnerable to delays in product development while navigating compliance. 67% of startups in their first year of operations agree that digital regulations contribute to innovation delays, compared with around 48% of startups that have been operating for more than 10 years.
Investor sentiment and capital allocation
For investors, regulatory shifts are actively informing capital allocation, risk appetite, and growth expectations. 63% of VCs report that compliance readiness and regulatory considerations are now important factors or primary drivers of investment decisions.
More restrictive regulations dampen the investment outlook. Under scenarios of regulatory tightening, VC caution increases, with only 39% expecting to increase investments, down from 54%.
This shift results in a reallocation of resources. 30% of VCs report that they are likely to reduce exposure to high-risk startups and 28% say they would require greater compliance efforts from portfolio companies.
Similarly, 44% of incubators also indicate that they may allocate additional program time and resources to compliance capability-building, while 26% say they would adjust their selection criteria to favor startups that are better prepared to meet regulatory requirements.
Uncertainty and trust
Anticipated regulatory shifts also shape investment behavior and fundraising abilities. 61% of startups say that regulatory uncertainty makes it more difficult to raise capital, while 67% of VCs agree that stringent digital regulations increase uncertainty around expected returns, a concern most acute in data governance (75%) and cybersecurity (66%).
In response, 67% of investors are taking a more cautious approach, translating to 65% requiring enhanced compliance processes or documentation in portfolio companies, 59% conducting regulatory risk assessments, and 46% adjusting their investment covenants accordingly.
Despite these challenges, the research found that digital regulations can also generate trust benefits. 47% of startups agree that digital regulations increase customer trust in their products and services, an impact that’s more pronounced for more mature startups with 56% of startups that have at least 10 years of operations realizing such benefits, compared with 33% of those with less than one year of operations.
This suggests that regulation-enabled trust disproportionality benefits established companies with existing reputations, customer bases, and operational scale. Younger companies, on the other hand, struggle to translate digital regulations into tangible trust advantages, while still needing to build credibility.
The digital regulatory landscape of India, Malaysia and South Korea
The report analyzes the distinct regulatory environments of key markets.
India is highlighted as a digital regulatory landscape that’s broadly supportive of the startup ecosystem with a digital restrictiveness score of 0.34 out of 1, classifying it as “Enabling”.
India employs a risk-tiered approach that balances open data flows with security requirements. While the country generally permits cross-border data transfers, it enforces selective data localization and operational obligations for sensitive sectors such as finance and telecommunications. In the realm of cybersecurity, India adopts a proactive stance aligned with international standards, emphasizing strict operational compliance.
Similarly, Malaysia is categorized as an “Enabling” jurisdiction with a digital restrictiveness score of 0.34 as well. Malaysia takes a pragmatic, sector-targeted approach to digital regulation that blends safeguards with openness to digital trade and innovation. In data governance, Malaysia has imposed stricter data residency and access requirements for regulated industries and highly sensitive workloads. Conversely, commercial cross-border data transfers are generally permitted where destination jurisdictions provide protections substantially similar to Malaysia’s personal data protection requirements or where equivalent safeguards are in place. On cybersecurity, obligations are stringent for National Critical Information Infrastructure but more flexible for other firms.
Finally, South Korea presents a more stringent digital regulatory landscape with a digital restrictiveness score of 0.51 out of 1, placing it in the “Restrictive” group. South Korea’s digital regulatory framework is characterized by strong safeguards for privacy, security, and national interests. Data protection rules are highly prescriptive and rigorously enforced with a scope and level of oversight comparable to the EU’s GDPR. Cybersecurity regulations are similarly stringent. Data localisation practices are relatively restrictive, but there are emerging policy efforts to facilitate cloud adoption and cross-border digital services.
Featured image: Edited by Fintech News Singapore, based on image by roypankaj via Magnific
