Innovation vs Regulation: Impact of confrontational policies on Nigerian start-ups

By Omoruyi Edoigiawerie, Esq

In recent years, Nigeria has experienced a surge in the number of start-ups, with the tech industry leading the charge. These start-ups have provided innovative solutions to some of Nigeria’s most pressing problems, from transportation to healthcare to education.

However, there is a growing concern that confrontational regulation is stifling the growth of these start-ups and hindering the development of the Nigerian economy.

One of the most significant challenges facing start-ups in Nigeria is the lack of regulatory clarity. Many startups operate in a legal grey area, with unclear regulations and ambiguous enforcement mechanisms.

This lack of clarity creates uncertainty for start-ups, making it difficult for them to plan and invest for the long term. In addition, it can also lead to arbitrary enforcement actions by regulators, which can be devastating for start-ups.

Start-ups are crucial for the growth of any economy. They create jobs, foster innovation, and provide solutions to societal problems. However, for start-ups to thrive, they need a conducive business environment that allows them to operate freely and grow without undue regulatory hindrance. Unfortunately, many start-ups around the world are facing the challenge of confrontational regulation, which has become a significant barrier to their growth.

Confrontational regulation refers to the practice of using regulations and regulatory agencies to stifle competition, limit innovation, and protect incumbent businesses from new entrants. This type of regulation is prevalent in many countries and is often deployed by governments and powerful industry players who have a vested interest in maintaining the status quo.

One of the most common forms of confrontational regulation is regulatory capture, where regulatory agencies become too cosy with the industries they are meant to regulate. Regulatory capture often leads to lax regulation, which allows incumbents to operate with impunity, while startups and new entrants are subjected to excessive scrutiny and regulatory hurdles.

Another form of confrontational regulation is the imposition of onerous regulations that disproportionately affect start-ups and small businesses. These regulations are often designed to protect incumbent businesses and create high barriers to entry for new players.

For example, in some countries, the cost of obtaining a license to operate in certain sectors can be prohibitively high for start-ups, effectively locking them out of those industries.

Confrontational regulation also manifests in the form of heavy-handed enforcement actions against startups. In some cases, regulatory agencies have been known to resort to aggressive tactics such as surprise inspections, asset seizures, and other punitive measures against start-ups that are seen as a threat to established businesses.

The negative impact of confrontational regulation on startups cannot be overstated. It creates an uneven playing field, stifles innovation, and limits job creation. It also leads to a concentration of economic power in the hands of a few incumbents, which can have wider implications for economic growth and social development.

I have always maintained that confrontational regulation stifles innovation because an environment that is hostile to new ideas and technologies is created. Start-ups are often discouraged from developing new products or services because they believe that they will face significant regulatory hurdles, and this poses a nightmare for them.

The implication of this is simple, the pace of innovation in the Nigerian economy will not just be slowed down, but even worse, a drastic reduction in the potential benefits that startups can bring to improve the economy.

Perhaps the most significant consequence of confrontational regulation is the impact it can have on investment. Investors are often wary of investing in start-ups operating in a regulatory environment that is hostile and unpredictable.

This can make it difficult for start-ups to attract the capital they need to grow and scale their businesses. In addition, investors are often deterred by the potential legal and financial risks associated with confrontational regulation, reducing the pool of available investment capital.

*What should be done?

There are several steps that can be taken to address the problem of confrontational regulation in Nigeria:

First, there needs to be a greater focus on regulatory clarity. Regulators should work closely with industry stakeholders to develop clear and unambiguous regulations that are easy to understand and comply with. This will help to reduce uncertainty for startups and create a more stable regulatory environment. This is why I am particularly excited by the Business Facilitation Act 2023, enacted with the principal objective of eliminating administrative bottlenecks and promote the ease of doing business in Nigeria, it is hoped it serves as a step in the right direction to provide the much-needed clarity and certainty of regulation and regulatory support that start-ups need.

Secondly, there needs to be a greater emphasis on regulatory cooperation. Regulators should work with start-ups to understand their business models and the challenges they face in complying with regulations. This will help to develop regulatory systems that are tailored to the needs of start-ups, rather than imposing a one-size-fits-all approach. The Nigeria Start-up Act is one law that embodies regulatory cooperation, and it serves as a reminder that Public and private sector relationships when intentionally built can produce impactful results.

Thirdly, there needs to be a greater emphasis on innovation-friendly regulation. Regulators should take a proactive approach to encourage innovation, rather than stifling it through excessive regulation. This could include the development of more accelerator and incubator hubs and provision of support for them also sandbox environments should be encouraged where start-ups can test new products and services in a controlled environment, without fear of regulatory sanctions.

Additionally, there needs to be greater transparency in the regulatory process. Regulators should be open and transparent about their decision-making processes, including the criteria used to assess compliance and enforcement actions. This will help to build trust between regulators and start-ups and reduce the risk of arbitrary enforcement actions.

Lastly, there needs to be a greater focus on building regulatory capacity. Regulators should be adequately trained and resourced to effectively regulate the start-up ecosystem. This will help to ensure that regulations are effectively enforced, without imposing unnecessary compliance costs on start-ups. I have continued to maintain that regulation in the start-up ecosystem must be by people who understand the dynamics of the environment and can actively relate to the issues that pervade the space anything other than this will lead to a theoretical application of the rules, and it will always be met with half-baked results.

In conclusion, confrontational regulation is a significant challenge facing startups around the world. To promote start-up growth, governments must prioritize regulatory reforms that foster competition, innovation, and consumer protection.

At the same time, start-ups must take proactive steps to mitigate the impact of confrontational regulation on their operations. With the right policies and practices in place, it is possible to create a regulatory environment that promotes start-up growth and helps to drive economic development.

Omoruyi Edoigiawerie is the Founder and Lead Partner at Edoigiawerie & Company LP, a full-service law firm offering bespoke legal services with a focus on startups, established businesses and upscale private clients in Nigeria. The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances. His firm can be reached by email at hello@uyilaw.com