Startups and small and medium-sized enterprises (SMEs) are the lifeblood of Asia’s economies. They account for about 70 percent of jobs and over a third of GDP, and they are at the forefront of the region’s productivity gains. Across industries, SMEs and dynamic startups are using artificial intelligence (AI), data analytics, and cloud services to reimagine business models and create new markets.
Yet, at the very moment when innovation is accelerating and digitization enables SMEs to scale, a number of Asian governments are contemplating regulatory approaches modeled on the European Union’s new digital laws: the Digital Markets Act (DMA), the Digital Operational Resilience Act (DORA), and the Artificial Intelligence (AI) Act.
While Europe’s key goals such as consumer protection are legitimate, the kind of heavy, prescriptive regulations that Europe is pursuing risk slowing the region’s momentum by imposing high fixed costs on small firms.
Asia now faces a fork in the road: follow Europe down the path of regulatory overreach, or choose an approach that safeguards trust while sustaining innovation.
Europe’s experience offers a warning for Asian economies, for three reasons.
First, Europe’s performance in innovation and digital competitiveness continues to trail that of the United States. For example, America has eight times more unicorns – startups valued above one billion dollars – than Europe, and of the world’s 50 largest technology companies, only four are European, none founded in the last half-century.
Nearly 30 percent of Europe’s unicorns have moved their headquarters abroad, mostly to the U.S., seeking more favorable investment and regulatory conditions. In AI, the gap is even starker: the U.S. produces roughly four times more startups and attracts eight times more venture capital than Europe.
While European universities have great talent, European regulations have undercut commercialization of new technologies.
Second. the regulations Europe drives are expected to widen these gaps. The combined compliance and potential fines linked to the DMA, DORA, and AI Act are estimated at 0.2–0.5 percent of EU GDP, or some €39-90 billion annually. DORA alone obliges financial institutions and their technology vendors to build extensive risk-management systems.
Mid-sized firms report costs of €500,000 to €1 million; large firms spend €5-15 million. Smaller financial institutions have responded by cutting research and development budgets by as much as 10 percent to fund compliance.
The AI Act adds another layer. The European Commission expects total compliance costs of €100–500 million by 2025, with each firm required to establish a Quality Management System costing up to €330,000 and another €70,000 a year for maintenance. For startups, these are daunting sums. A firm that has raised €1 million may need to devote 10-20 percent of management time and up to 20 percent or €200,000 a year in compliance. Surveys show that more than half of European companies are unclear about their legal obligations, prompting them to “over-comply” to avoid penalties.
The result is that Europe’s most innovative firms are spending more time navigating rules than developing new technologies.
Large incumbents can absorb such burdens; small innovators cannot. The unintended consequence is a widening gap between established firms and new entrants. Surveys of European financial services reveal that 57 percent of those with fewer than 50 employees plan to reduce technology spending by at least five percent, and 77 percent to cut R&D.
Many expect to raise customer prices by three to ten percent to recover costs. Rather than leveling the playing field, Europe’s regulations have tilted it toward the largest players.
Third, Europe itself has come to having second thoughts about its restrictive digital regulations. In November 2025, the EU launched “Digital Omnibus” legislative proposals for the simplification of AI rules as well as of simplifying and combining EU’s various data, privacy, and cybersecurity rules.
These initiatives build on the 2024 report by the Former head of the European Central Bank Mario Draghi who argued that excessive regulations are undermining Europe’s competitiveness, and the European Commission’s 2025 Competitiveness Compass aimed to bridge EU’s innovation gap.
Asia should not replicate Europe’s model of complex and heavy digital regulations. Asia’s digital ecosystems are competitive and diverse, with local innovators and unicorns thriving in a symbiotic relationship with global platforms.
Prematurely imposing the same ex-ante restrictions could chill investment and limit competition, and hamper especially startups that drive tomorrows growth gains – exactly as Europe is now discovering. Instead, Asia can draw on frameworks that balance innovation with responsibility.
Japan’s emerging approach to AI governance provides a positive model. The 2025 AI Promotion Act emphasizes cooperation between government, academia, and business to promote the safe and inclusive development of AI.
Rather than relying on punitive pre-approval systems, Japan uses voluntary standards, sandbox testing, and transparency mechanisms to guide firms’ behavior. It combines this with significant public investment in computing infrastructure, semiconductor capacity, and digital skills to ensure that both large corporations and startups can access the tools needed to compete globally. This approach rests on a principle of co-regulation: government sets broad expectations, industry leads in implementation, and feedback loops keep rules adaptive as technology evolves.
Singapore is pursuing a similar course, encouraging companies to adopt AI governance frameworks voluntarily while supporting open innovation through data sandboxes and trusted cloud infrastructure. Both countries show that it is possible to uphold safety and ethics without suppressing entrepreneurship.
The lesson for Asia is clear. Regulation is necessary to maintain trust, but it must be proportionate, risk-based, and innovation-friendly. Europe’s lackluster record in driving economic growth and innovation and its current efforts to unwind the burdensome web of digital regulations should give Asian governments interested in the EU’s model a pause.
Asia now has the opportunity to chart a different course: a pragmatic “Tokyo Model” of digital governance that enables its startups and SMEs to remain engines of productivity, inclusion, and growth in the AI era.
