Findings from a Oxford Economics study, commissioned by Digital Prosperity Asia (DPA), reveals that digital regulation has become a structural force in Asia’s technology sector, with compliance costs now embedded in startup operations.
The study reveals a central paradox at the heart of Asia’s digital transformation: regulation is both a catalyst and a constraint for startup growth and venture capital (VC) investment.
According to the Digital Policy Alert, digital policy interventions in Asia have multiplied eighteenfold since 2018. Oxford’s report shows that regulatory design choices are not just shaping day-to-day business realities, they are also compounding into different innovation and investment outcomes across the region’s leading tech markets.
“Digital regulations can strengthen trust and confidence in the digital economy, but the benefits are often realised unevenly and over a longer horizon,” said Henry Worthington, Managing Director, Economic Consulting at Oxford Economics.
“Among startups in their first year, only one in three reports an increase in customer trust attributable to regulation, compared to more than half of firms with over a decade of operations.
“Meanwhile, compliance costs and uncertainty are immediate and widespread with nearly nine in ten startups reporting operational constraints from digital regulations. This imbalance matters because it ultimately shapes how regulation influences innovation, investment, and the broader startup ecosystem.”
DPA has identified three key themes from the report that are relevant to the startup ecosystem and regulators in Asia Pacific:
Compliance is now a structural cost, not a one-time expense
Over a third of startups report that regulatory requirements are a major or severe constrain to their operations. This burden is not just financial, it drives startups to reorganize their operations, invest in compliance processes, and hire specialized talent.
72% of startups report that they have already taken steps to strengthen internal compliance processes, indicating that compliance costs are structural rather than one-off.
For early-stage founders, this means a substantial share of their resources is dedicated to navigating regulatory obligations rather than building products or acquiring customers. Compliance readiness is now a foundational requirement for any startup aiming to scale.
Key insights include:
- 88% of startups report operational constraints from digital regulatory compliance, with 28% describing the impact as major or severe. 71% allocate more than 5% of operating costs to compliance, and 42% dedicate over 15% of their operating costs to compliance, rising to 56% among first-year startups.
- 72% of startups have reorganized operations in response to regulations. Startups, on average, report that internal spending on compliance-related talent represents the largest component of their compliance costs (43%), followed by external legal and advisory services (25%).
Compliance spending is crowding out innovation especially for early-stage startups
Innovation is the engine of startup growth, but digital regulations are systematically diverting resources away from R&D and product development toward compliance. 83% of startups report that digital regulations have impacted their innovation activities, with nearly two-thirds reallocating financial resources from core innovation pipelines to compliance.
This shift leads to slower product development and longer time-to-market, disproportionately affecting younger startups with limited resources. The talent pipeline is also shifting, with hiring priorities moving from technical roles to compliance professionals, potentially undermining long-term competitiveness.
Key insights include:
- Over eight in 10 (83%) of startups report that digital regulations have impacted their innovation activities. Specifically, 66% have redirected financial resources from R&D and product development toward compliance.
- 56% of startups report delays in product development or longer time-to-market. These effects are more pronounced among younger startups, with 67% noting this shift, compared to startups operating for more than 10 years (48%).
Regulatory environment directly determines access to capital – and the stakes are quantified
Access to capital is vital for startup survival and growth, and digital regulations are now a primary factor in investor decision-making. Nearly two-thirds of venture capitalists consider regulatory considerations as an important or primary driver of investment decisions, leading to more cautious investment strategies and higher compliance demands. The impact is tangible: under more restrictive regulations, the share of startups expecting investment growth nearly halves.
Key insights include:
- 63% of VCs identify digital regulations as an important or primary driver of investment decisions. The share of startups expecting investment growth drops from 44% under current conditions to just 26% under a more restrictive regulatory environment.
- Economic modelling shows that more restrictive regulations in Malaysia could reduce VC funding by 26% over 2026 to 2035 (~US$200 million/year less on average), while a similar shift in India could lower VC investment by 25% (~US$10 billion/year less on average). Conversely, a shift to more enabling regulations in South Korea would increase VC funding by 20% (~US$1.6 billion/year more on average) over the same period.
“Digital regulations are now a defining force in Asia’s startup ecosystem, shaping how businesses innovate, invest, and scale,” said Koh Liang Wei from the DPA Secretariat.
“As compliance becomes a structural cost for startups, this report highlights how overly restrictive regulations can inadvertently stifle the potential of startups.
“Policymakers now have a unique opportunity to design frameworks that empower startups while safeguarding trust,”