Asia’s Startups Are Hindered By Confusing And Outdated Laws, Says The Economist Intelligence Unit

Asia boasts almost half of the world’s two billion Internet users, rapidly growing digital infrastructure and strong mobile penetration. So what’s keeping the continent’s startup industries from producing a rival to Amazon, eBay or Facebook? In a new report, research group the Economist Intelligence Unit identifies an almost overwhelming array of obstacles for the region’s startups–including laws governing online businesses that have resulted in jail time for entrepreneurs.

Commissioned by the Asia Internet Coalition and based on interviews with more than 30 Internet platform and content creators, “Good to grow? The environment for Asia’s Internet businesses” examines the challenges faced by the region’s emerging startup ecosystems. There are many, including limited online payment options, lack of collaboration among entrepreneurs and few opportunities for monetization. One of the trickiest issues for startup founders, however, is intermediary liability, or regulations that force them to take responsibility for illegal activity by third parties on their platforms.

The most extreme and high profile example of these regulations are in China. For example, microblogging Sina Weibo’s 500 million users are banned from searching for words like “truth” and the names of certain individuals. The microblogging platform has also struggled with implementing real-name registration, despite being instructed to by the Chinese government.

Despite China’s infamously stringent Internet censorship, it is not the only Asia country where tech companies face heavy legal consequences for activity by users. Last year in Thailand, Chiranuch Premchaiporn received a jail sentence after comments deemed offensive to the country’s royal family were posted on a Web site she owned.

Poorly worded IT laws result in high administrative costs and uncertainty for tech startups in many countries. In 2004, Avnish Bajaj, the CEO of eBay’s India auction business, was arrested and imprisoned under country’s Information Technology Act after a customer used the service to sell pornography. Nine years later, Indian tech entrepreneurs are still hampered by confusing regulations, which mean that they are held liable for content posted on their sites by third parties even though it’s often unclear exactly what they need to monitor.

Another example of confusing legislation is South Korea’s Shutdown Law. Though it forces online gaming companies to verify users’ ages through ID cards, other laws prohibit Web sites from collecting personal data such as social security numbers from users, making it difficult for sites to check the age of users (indeed, plenty of Korean teenagers have already found ways to get around the Shutdown law).

Governments often impose confusing and restrictive laws because, as the EIU’s report puts it, “legislation cannot hope to keep up the rapid pace of innovation and the emergence of disruptive online business models.” Many tech entrepreneurs in Asia “report that their government does not grasp the economic importance of the Internet and the role that regulation can play in either enabling or hobbling it.”

One of the most striking examples of shortsighted lawmaking is in Taiwan, where a mandatory seven-day trial period and return policy applies to all online and offline purchases. While this policy makes sense for items like clothing, it doesn’t work for songs or apps. When Google disputed the law with the Taipei City government, sales of paid apps on Google Play in Taiwan were suspended for 20 months.

Though research from the McKinsey Global Institute estimated that the Internet economy contributed 5.4% of Taiwan’s GDP in 2010, the country’s legislators continue to enforce laws that restrict the industry’s growth. For example, the Taiwanese government did not relax rules governing third-party payment services until November 2012, which made it almost impossible for small businesses to accept online credit card payments.

Of course, legislation is necessary in order to protect Internet users and e-commerce consumers. In Vietnam, where regulation is still relatively undeveloped, startups have more freedom to innovate and scale up quickly. But the lack of laws governing online businesses also mean that consumer confidence in Internet companies is so low that it hampers monetization efforts.

While Asia’s startups have plenty of room to grow, it is crucial for governments to strike the right balance between encouraging innovation and protecting users when drafting laws governing the tech industry. Otherwise, many of Asia’s emerging economies risk missing out on the benefits of a thriving tech industry.