Asia startup regulation adds heavy compliance burden

Oxford Economics has published a study on how digital regulation is affecting startup ecosystems in Malaysia, India and South Korea. Commissioned by Digital Prosperity Asia, the research drew on a survey of 1,550 stakeholders in the startup ecosystem.

The findings suggest regulation has become a fixed operating cost for many startups across Asia, with businesses diverting money and staff time to compliance. That shift is influencing how startups organise teams, allocate spending and assess risk.

One of the clearest findings was the scale of the compliance burden. The study found that 88% of startups said digital regulatory compliance had created operational constraints, while 28% described the effect as major or severe.

Compliance also absorbs a meaningful share of budgets. The report found that 71% of startups allocate more than 5% of operating costs to compliance, and 42% allocate more than 15%. Among startups in their first year, that figure rises to 56%.

Startups are responding by changing internal structures. Some 72% reported reorganising operations in response to regulation. Internal spending on compliance-related staff accounted for the largest share of compliance costs at 43%, followed by external legal and advisory services at 25%.

Innovation pressure

Regulation is also affecting product development and research spending. The report found that 83% of startups had seen an impact on innovation activities, while 66% had redirected financial resources from research and product development to compliance.

Product timelines also appear to be under strain. More than half of startups (56%) reported delays in product development or longer time-to-market. Younger firms were more likely to report these effects than businesses that had been operating for more than a decade.

Oxford Economics said this creates an uneven effect across the startup landscape. Older companies may be better placed to absorb compliance demands, while newer businesses face sharper trade-offs between meeting regulatory requirements and building products or winning customers.

"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 of 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."

Capital decisions

Digital regulation is also weighing on investment decisions. Nearly two-thirds of venture capital investors surveyed, 63%, said regulatory considerations were an important or primary driver of where they invest.

That caution carries through to startup funding expectations. Under current conditions, 44% of startups expect investment growth, but that drops to 26% in a more restrictive regulatory environment, according to the report.

Its modelling suggests the financial effects could be substantial in larger markets. In Malaysia, more restrictive regulations could cut venture capital funding by 26% between 2026 and 2035, equivalent to about USD $200 million less each year on average. In India, a similar shift could reduce investment by 25%, or about USD $10 billion a year on average.

South Korea was the contrasting case in the modelling. A move to a more enabling regulatory setting would increase venture capital funding by 20% over the same period, or around USD $1.6 billion a year on average.

The report placed these findings against a backdrop of rapidly rising policy activity across the region. It cited data from Digital Policy Alert showing that digital policy interventions in Asia have increased eighteenfold since 2018.

That expansion in rules and oversight means compliance is no longer a one-off adjustment for founders. Instead, the research suggests it has become part of the basic cost of running a technology business, particularly in sectors that handle data, digital services and online platforms.

Digital Prosperity Asia, which represents small and medium-sized enterprises and startups across Asia-Pacific, said the results show how regulatory design choices shape business outcomes across markets. The group has argued for frameworks that maintain trust without placing excessive strain on younger, resource-constrained companies.

"Digital regulations are now a defining force in Asia's startup ecosystem, shaping how businesses innovate, invest, and scale. 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," said Koh Liang Wei of the DPA Secretariat.