Digital Prosperity Asia and Oxford Economics have released a study on the financial impact of digital regulations on startups in South Korea.

The research reveals that 86% of local startups face operational constraints due to compliance requirements, which are increasingly diverting funds away from research and development.

The study highlights how compliance obligations are becoming a structural cost rather than a one-time adjustment.

According to the report, 76% of startups in South Korea allocate more than 5% of their operating budgets to compliance. Among this group, 44% spend over 15% of their operating costs on meeting regulatory requirements.

To manage these demands, nearly eight in 10 startups have reorganised their operations. This includes building new internal compliance processes, migrating to compliant cloud infrastructure, and hiring external legal or advisory support.

Innovation budgets diverted

The financial burden of compliance is directly affecting product development. The study notes that 77% of startups report an impact on their innovation activities, with 58% stating they have diverted funds from research and development into compliance efforts.

These pressures are most severe for early-stage companies. Nearly half of all surveyed startups report delayed product development or longer time to market. For businesses operating for one to two years, this figure rises to 62%.

Regulatory uncertainty impacts funding

The regulatory environment is also influencing how venture capital flows into the startup ecosystem. Half of the surveyed startups say digital regulations increase uncertainty around financial returns, complicating capital raising efforts.

Investors share this view. The study found that 58% of venture capitalists believe regulations make investment returns more unpredictable.

If rules tighten further, half of the surveyed venture capitalists indicated they would reduce their exposure to higher-risk startups.

“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,”

said Henry Worthington, Managing Director of Economic Consulting, Oxford Economics.

He added that while regulation remains essential for consumer protection, the economic stakes are significant.

Economic modelling by Oxford Economics suggests that adopting more flexible digital policies could boost startup formation by 15% and increase venture capital investment by nearly 20% between 2026 and 2035.

Conversely, a restrictive regulatory approach could result in 130 fewer startups forming annually and a 10% drop in venture capital investment over the same period.

Featured image credit: Edited by Fintech News Hong Kong, based on image by muhagraph via Magnific