A more restrictive digital regulatory environment could cost Malaysia’s startup ecosystem RM792 million in annual venture capital investment over the next decade, according to a new study by Oxford Economics, commissioned by Digital Prosperity Asia.

The study, based on a survey of 500 startup ecosystem stakeholders in Malaysia alongside expert interviews and economic modelling, found digital regulation has become a structural force shaping how startups manage compliance, allocate talent, invest in innovation and access capital.

Compliance costs are becoming structural

Eighty-eight per cent of Malaysian startups report operational constraints from digital regulations, with 23 per cent describing the impact as major or severe. Eighty-one per cent say the rules have increased compliance-related costs, and 68 per cent have taken active steps in response, including building new compliance processes and engaging external legal or advisory support.

Talent costs rise as R&D spending falls

• 74 per cent of startups report rising human capital costs, particularly for compliance, cybersecurity and data governance expertise
• 67 per cent say financial resources are being diverted from R&D toward compliance, a trend also observed by 64 per cent of VCs and incubators
• 57 per cent report delays in product development or longer time-to-market, while 59 per cent of VCs note a slowdown in innovation momentum

Regulatory uncertainty weighs on investment

Sixty-three per cent of startups say digital regulations increase market uncertainty and make it harder to raise capital, while 73 per cent of VCs say the rules heighten uncertainty around investment returns. Under a more restrictive scenario, the study found VC funding could fall by 26 per cent over 2026 to 2035, equivalent to roughly RM792 million less each year, alongside 210 fewer startups and about 22,000 fewer startup jobs supported annually by 2035. A shift toward more enabling regulation, by contrast, could lift VC funding by 6 per cent, or around RM198 million more a year.

“The implication is not that safeguards should be weakened, but that regulatory design, proportionality, and predictability will be critical to sustaining Malaysia’s startup momentum,” said Henry Worthington, Managing Director, Economic Consulting at Oxford Economics.

Koh Liang Wei of the Digital Prosperity Asia Secretariat said Malaysia’s current, broadly enabling regulatory approach is an asset worth preserving as rules on data, cybersecurity and AI continue to evolve, arguing that clear and consultative regulation directly shapes whether startups’ limited resources go toward compliance or toward hiring and expansion.