The approach that South African lawmakers take to regulating Internet businesses could make or break the growth of the country’s digital economy, a report from Fifth Era, a Silicon Valley-based investment and advisory firm, has found.

If digital technology is going to have as profound an effect on industries and economies as research suggests, then South Africa should worry about whether tech entrepreneurs choose to launch their businesses here, and whether domestic and foreign investors choose to back internet businesses here, said Matthew Le Merle, managing partner at Fifth Era.

“If domestic and foreign capital is scared away, the tech entrepreneurs will leave,” Le Merle said.

He was presenting the South Africa findings from the report, which surveyed 475 investors in 15 countries to assess how potential regulation might positively or negatively impact capital investment into internet companies.

The “Internet investors” surveyed needed to have a net worth, excluding their primary residence, of $1m or annual income of $200 000.

The survey found that 89% of global investors view the legal environment as having the most negative impact on their investing activities, while 75% said they are uncomfortable investing in business models in which the regulatory framework is ambiguous.

As lawmakers consider how to regulate areas such as copyright and intellectual property, liability, censorship and privacy and security, they will have to carefully consider not only what to regulate but the pace at which to regulate, Le Merle said.

The challenge for lawmakers is to regulate the “10% bad” while not losing the “90% good”, he commented.

For example, investors said they would be deterred from investing if the law allowed for site blocking for alleged copyright and IP offences or where websites would be obligated to remove content upon a government request without a court order.

Speaking after the launch of the report, Le Merle suggested that South Africa could develop a competitive advantage over other countries in the area of Internet regulation if regulators moved slowly and so derived the benefit of assessing what works and doesn’t work elsewhere.

“I don’t know of any country in the world that does a good job at engaging tech entrepreneurs and the people who back them. If South Africa did this it would put you ahead of other countries,” he said.

He highlighted that, often, large firms give input into regulatory policies when “they can cope with regulation in a way that tech entrepreneurs can’t”.