Regulation is increasingly becoming a critical factor when investors mull opportunities for investment in the digital eco- nomy and South Africa would do well to take a watered-down approach when pursuing new rules for Internet businesses.

A new report by Silicon Valley-based Fifth Era, commissioned by Google, shows that, globally, potential Internet investors fear uncertain or unnecessary regulatory policies and would rather look to invest into other industries or regions if the policies are too ambiguous.

The digital economy is set to be the biggest economic driver globally, with national economic and industrial policies placing innovation and technology high on the priority list, says Fifth Era managing partner Matthew Le Merle. “The notion of an innovation-based strategy always collapses down to the fact that we need entrepreneurs and venture capital and both are scarce,” he says.

Unpacking the findings of the ‘2016 Fifth Era Report – The Impact of Internet Regulations on Investment’, which surveyed 475 investors in 15 countries, he says the outcomes of the survey highlight the concern around unintended consequences of new or emerging Internet regulations.

“Entrepreneurs have a choice of whether or not to build a business and where to build a business. If you make it difficult for entrepreneurs to do business in your country, they will choose to go elsewhere,” he adds.

Regulation plays a significant role as a deciding factor for investors.

All 31 investors surveyed in South Africa said the legal environment had the most nega- tive impact on their investment activities in the Internet economy, with 74% saying they were “not comfortable” investing in business models where the regulatory framework was ambiguous.

This compares with global averages of 89% and 75% respectively.

Eighty-four per cent of South African investors noted that the risk of secondary liability and exposure to large damages was a concern, compared with 78% worldwide.

South African investors, much like their international counterparts, were also monitoring tax regimes closely, with the report showing that 81% of local respondents would be uncomfortable investing in Internet companies if South Africa applied rules subjecting Internet companies to double tax.

When questioned about intermediary liability protection and censorship, 87% said they would not be comfortable investing in Internet businesses if intermediaries could be held liable for third-party content or actions.

In terms of copyright and intellectual property regulations, 87% of investors said the adoption of US-based copyright regimes or similar anti- piracy laws would increase interest in investing in Internet businesses.

Further, 90% of the respondents indicated that they would “be less inclined” to invest in Internet businesses if user data was retained and disclosed to law enforcement on request without following international baseline standards.

Seventy-seven per cent of those questioned locally noted interest in investing more in Internet businesses if South Africa adopted poli- cies that reduced regulation in the mobile apps ecosystem.

The new and ever-changing Internet environment provides a significant burden for law- makers, who should rather slow the process down, “watch the world” and mull the successes of other countries before “cherry-picking” the best regulations to make South Africa the most attractive Internet investment destination among its peers.

Proactive regulations may not be the best route in the Internet economy given the vast uncertainty over where the industry would be in ten years, in addition to the fact that the impact of this industry is not yet fully understood, Le Merle comments.

“Investors would invest more in Internet businesses if government adopted policies that indicate it is supportive of new business models and protects freedom of expression online; if government invests in education and digital skills, [as well as] Internet and mobile infrastructure; enables policy that reduces taxes and fees for Internet and mobile end-users; promotes open data use; liberalises mobile payments; enables access to backhaul and spectrum; and releases transparent regulatory roadmaps and holds public consultations on all new Internet/mobile-related legislation and regulation.

“For developing economies like South Africa’s, where Internet businesses offer huge potential for gross domestic product and job growth, a stable and predictable regulatory environment is critical to encouraging investment,” Le Merle concludes.