How Data Protection Regulation Affects Startup Innovation

Abstract While many data-driven businesses have seen rapid growth in recent years, their business development might be highly contingent upon data protection regulation. While it is often claimed that stricter regulation penalizes firms, there is only scarce empirical evidence for this. We therefore study how data protection regulation affects startup innovation, exploring this question during the ongoing introduction of the EU General Data Protection Regulation (GDPR). Our results show that the effects of data protection regulation on startup innovation are complex: it simultaneously stimulates and constrains innovation. We identify six distinct firm responses to the effects of the GDPR; three that stimulate innovation, and three that constrain it. We furthermore identify two key stipulations in the GDPR that account for the most important innovation constraints. Implications and potential policy responses are discussed.