Regulatory policy can inhibit investment in Internet companies - and governments wanting to drive growth in the digital economy need to ensure policy doesn't unintentionally stifle this.

This is according to the 2016 Fifth Era Report - The Impact of Internet Regulations on Investment - which was launched in South Africa on 5 May.

Commissioned by Google and conducted by Fifth Era, the report shows that governments in developing countries need to ensure that regulatory policies do not inhibit investment in the ICT sector.

Fifth Era surveyed 475 investors in 15 countries, representing a spectrum of more to less developed internet economies, in order to assess the degree to which the future legal environment might impact their investments in Internet companies.

Concern in Nigeria

Nigerian investors were asked about four areas of potential legislation and the degree to which they might become uncomfortable investing as a result.

According to research 81% of Nigerian investors view the country's legal environment as having a negative impact on their investing activities.

Insight into Nigeria's regulatory environment showed that 77% of investors are concerned about the risk of secondary liability and exposure to potentially large damages. In addition to regulatory ambiguity, a large percentage (84%) of investors are closely monitoring taxation and would be uncomfortable investing in internet businesses should the country apply tax rules that make Internet businesses operating overseas subject to double taxation.

Speaking at the launch event in Johannesburg, Fifth Era researcher Matthew C. Le Merle said that the digital economy will be the most significant driver of growth of GDP, jobs and well-being in the next five years.

Most national governments understand this, he stated, noting that most governments have an innovation strategy in their national and industrial plans.

"The notion of an innovation-based strategy always collapses down to the fact that we need entrepreneurs and venture capital and both are scarce," Le Merle comments. 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 says.

A question of policy in South Africa

31 investors in South Africa were assessed and all said that the current legislative / policy environment in the sector has a negative impact on their investment activities.

According to findings of the research, 74% of those surveyed said that they are not comfortable investing in business models where the regulatory framework is ambiguous.

• 84% said the risk of secondary liability and exposure to large damages was of concern.

• Conversely, 87% said they would likely increase their investment if South Africa adopted anti-piracy laws similar to those in the US.

• 81% of those surveyed would not be comfortable investing in Internet companies if South Africa applied tax rules that make Internet companies liable for double taxation.

• 87% of investors surveyed said they would not be comfortable investing in internet businesses if intermediaries could be held liable for third party content or actions (for example internet service providers or user-uploaded content hosters).

• 58% percent of investors said they would be uncomfortable investing in internet or mobile businesses if regulators apply traditional telecom regulations and tariffs to mobile messenger and free online content services such as Whatsapp or Viber. Conversely, 77% would be interested in investing more in internet businesses if South Africa adopts policies that reduce regulation in the mobile apps ecosystem.

90% said they would be less inclined to invest if country user data is retained and disclosed to law enforcement on request, unless international baseline standards are followed. Allowing security agencies to install their own equipment on ISP networks would deter 77% of investors.

According to research investors would invest more in Internet businesses if the government adopted policies that indicate it is supportive of new business models (eg the sharing economy) and protect freedom of expression online

Investment in education and digital skills, in internet and mobile infrastructure, was highlighted as important, as is policy that reduces taxes and fees for internet and mobile end users, promotes open data use, liberalises mobile payments and enables access to backhaul and spectrum.