South Africa’s uncertain digital regulatory environment may deter investors and tech entrepreneurs, despite the
country’s potential to become Africa’s digital hub, according to a survey launched in Johannesburg on Thursday (May 5).
“The Impact of Internet Regulation on Investment” was commissioned and funded by Google and conducted by Fifth Era, a Silicon Valley advisory and investment firm. Researchers spoke to 475 investors in 15 countries to assess whether countries are designing the kind of regulation that attracts investors and makes entrepreneurs want to stay.
All the 31 investors surveyed in South Africa said the legal environment is deterring investment in the digital economy. A further 74% of the respondents said they were uncomfortable investing in a start-up in a country where the regulatory framework is ambiguous. The survey compared issues such as double taxation and uncertain liabilities with attitudes around the world.
“In this situation, why be an internet investor when you’re going to be crushed by regulation?” asked Matthew Le Merle, managing partner of Fifth Era. “Internet businesses can be wiped out by the errant stroke of a pen.”
South Africa has created a blueprint for growth, dubbed the National Development Plan. Launched in 2012 with an explanatory YouTube video, the plan says that, along with basic amenities like clean water and affordable housing, internet access and digital innovation are essential to the country’s growth. So far, implementation has been slow and haphazard.
Less than half of South Africa’s population has access to the internet, according to the World Bank. Internet regulation is still experimental, but already poses a problem to some nascent digital industries.
Sales of video games in South Africa, for instance, generate about $148 million a year, but almost all that revenue comes from games created by global players like Disney, which often contracts with small, local developers. Nick Hall, a gaming lawyer and head of the non-profit Interactive Entertainment South Africa, says the country’s existing regulations and potential laws deter development of a local industry.
The South African Reserve Bank’s far-reaching laws on the receipt of foreign currency prevent the sale of any patents or intellectual property outside of South Africa without prior approval of the Financial Surveillance Department. For game developers, the law means they can’t sell a game to international distributors without a rubber stamp from reserve bank officials, says Hall. He said that some of his clients have missed opportunities to sell their games while waiting for approval.
South Africa’s Film and Publication Board regulates all media to ensure that they are in line with freedom of expression laws and child protection laws, and is considering expanding this policy to games. That could create a bottleneck for video games waiting to be validated, said Hall. The proposed regulation may force existing games to be pulled off the web, which as the internet regulations survey showed, does not sit well with investors.
Grappling with basic development issues and advanced regulatory demands, South Africa’s regulatory picture may seem bleak. Le Merle says the country should move slow on regulation to allow the digital economy to develop, copy working models and be ready to regulate quickly when necessary.
This article was first published in QUARTZ on 6 May 2016