Findings from an Oxford Economics study, commissioned by Digital Prosperity Asia (DPA), reveal that digital regulations are reshaping the operating environment for South Korea’s startup ecosystem, shaping how startups manage compliance, allocate talent, invest in innovation, and access capital.
The study finds that while digital regulations play an important role in strengthening trust, security, and resilience, their design choices have immediate and material implications for startups.
In South Korea, 86% of startups report that digital regulations impose operational constraints, with nearly one in four describing the impact as major or severe. At the same time, half of startups say digital regulations increase uncertainty around returns, making it more difficult to raise capital.
“South Korea’s startup ecosystem is among the strongest in Asia, but our research suggests that regulatory design is becoming a key determinant of future growth. While regulation remains essential for building trust and protecting consumers, the economic stakes are significant,” said Henry Worthington, Managing Director, Economic Consulting at Oxford Economics.
“Our modelling shows that a more enabling regulatory environment could drive greater startup formation, attract more investment, and support job creation over the coming decade, helping South Korea remain a leading destination for digital innovation.
“The challenge for policymakers is to strike the right balance between trust, security, and innovation.”
Compliance is now a structural cost for South Korean startups
For many South Korean startups, compliance is no longer a one-off adjustment. It is becoming embedded into day-to-day operations, requiring startups to reorganise internal processes, invest in compliance capabilities, and shift resources away from other business priorities.
The study finds that over three-quarters of startups in South Korea allocate more than 5% of operating costs to compliance, and among these, 44% devote more than 15% of operating costs to compliance.
Nearly eight in 10 startups have also reorganised their operations in response to current digital regulations, including building new compliance processes, shifting to compliant cloud infrastructure, and engaging external legal and advisory services.
Key insights include:
- 86% of startups in South Korea report operational constraints from digital regulations, with 24% describing the impact as major or severe.
- 76% of startups allocate more than 5% of operating costs to compliance, and 44% of these startups devote more than 15% of operating costs to compliance.
- 79% of startups have reorganised operations in response to current digital regulations, including building new compliance processes, shifting to compliant cloud infrastructure, and engaging external legal and advisory support.
Compliance pressures are diverting resources from innovation
The study finds that digital regulations are affecting how South Korean startups allocate financial, technical, and human resources. Over three-quarters (77%) of startups report some impact on innovation activity, while nearly six in 10 indicate that financial resources are being diverted from research and development toward compliance.
These pressures are particularly relevant for younger and smaller startups, where limited resources make trade-offs more acute. Nearly half of startups report delays in product development or longer time-to-market, with the effect more pronounced among startups operating for one to two years and those with fewer than 10 employees.
Key insights include:
- 77% of startups in South Korea report that digital regulations have impacted their innovation activity.
- 58% of startups indicate that financial resources are being diverted from R&D toward compliance.
- 46% of startups report delays in product development or longer time-to-market, rising to 62% among startups operating for one to two years.
Regulatory uncertainty is shaping startup investment
Access to capital is a critical factor for startup growth, and the study finds that digital regulations are increasingly part of the investment environment in South Korea. Half of startups say digital regulations increase uncertainty around returns, while 58% of VCs say regulations make investment returns more uncertain.
If digital regulations become more stringent, the share of startups expecting investment to increase falls from 43% under current conditions to 31%. Investors are also likely to adjust their risk appetite: half of VCs say they would reduce exposure to higher-risk startups if digital regulations tighten.
Key insights include:
- 50% of startups say digital regulations increase uncertainty around returns, making it harder to raise capital.
- 58% of VCs say digital regulations make investment returns more uncertain.
- If digital regulations increase, the share of startups expecting investment growth declines from 43% to 31%.
- 50% of VCs say they would reduce exposure to higher-risk startups if digital regulations tighten.
Regulatory design has measurable economic implications for startup growth
Oxford Economics’ modelling shows that regulatory design choices could have measurable implications for South Korea’s startup ecosystem. A shift toward more flexible and enabling digital policies could increase startup formation by 15% and VC investment by almost 20% over the 2026 to 2035 period.
This is equivalent to 240 more startups being set up each year, an additional ₩2.4 trillion in VC investment annually, and approximately 21,000 more startup jobs supported in 2035.
By contrast, a more restrictive regulatory trajectory could reduce startup formation by 8% and VC investment by 10% over the same period, equivalent to 130 fewer startups annually, ₩1.3 trillion less in VC investment each year, and around 12,000 fewer startup jobs supported in 2035.
Key insights include:
- A more flexible and enabling regulatory trajectory could increase startup formation by 15% (240 startups) and VC investment by almost 20% (₩2.4 trillion) over 2026 to 2035. This would also support approximately 21,000 startup jobs in 2035.
- A more restrictive regulatory trajectory could reduce startup formation by 8% (130 startups) and VC investment by 10% (₩1.3 trillion) over the same period, with around 12,000 fewer startup jobs supported in 2035.
“For startups and SMEs, digital regulations are not abstract policy issues. They shape everyday decisions around product development, hiring, fundraising, and market expansion,” said Koh Liang Wei from the DPA Secretariat.
“This study highlights the importance of ensuring that regulatory frameworks are risk-based, proportionate, and practical for businesses of different sizes and stages.”
