A report released today by the Data Catalyst Institute (DCI) reveals a negative effect to the European Union (EU) startup economy due to the EU’s General Data Protection Regulation (GDPR).
Written by Dr. Liad Wagman, Associate Professor of Economics, Stuart School of Business, Illinois Institute of Technology (Chicago, IL) and his Ph.D. student Jian Jia, the report is timely as other countries including the US consider adopting data policies similar to GDPR.
“Understanding the economic impact of any regulatory reform is a crucial first step, especially for markets that are fast evolving on the global stage,” said Dr. Wagman.
“There is a strong need for more empirical research on privacy and data protection. Our results thus far show that the potential consequences for markets, and particularly for smaller market actors, are substantial.”
The report is the result of an economic analysis on a uniquely constructed five-year data set to describe the financial impact of the first year of GDPR on venture investment in EU technology startups.
Key findings include:
- GDPR had a negative effect on investment in EU ventures, particularly for foreign investments, younger ventures, and data-reliant firms.
- 26.1% reduction in the number of monthly EU deals
- 33.8% reduction in the average dollar amount raised per deal
- Countries reliant on foreign investment in new technology businesses stand to lose more from implementing a regulation such as GDPR, which has implications for US federal and state privacy legislation
“Today’s modern economy is rooted in the flow of data – data that companies generate for themselves, data that can be obtained from governments and other sources, and data that can be operationalized and monetized,” said Dr. Mark Drapeau, DCI’s Head of Research.
“Wagman and Jia’s elegant and rigorous analysis of venture investments in EU startups before and after GDPR demonstrates the unintended consequences of government restriction on the global flow of data.”
It remains unclear how the effects on EU ventures will adjust over the long run in response to GDPR; the short-run effects identified in this report are likely to impact how innovation outcomes arise and are competed over in the EU in the near future.
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