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Cookie alert: A warning tells Financial Times readers that they are being tracked. The disclosures are the result of European privacy laws.

Other recent research finds that Europe’s regulations have scared off some investors. Economist Joshua Lerner at Harvard Business School studied the effect of European legislation on venture capital investments in online advertising firms. In an industry-funded paper published this year, Lerner estimated that investment in European companies dropped about 73 percent following the implementation of the 2002 directive.

Overall, Lerner calculated that over a period of eight years, venture capitalists invested around $249 million less than expected. Europe’s privacy stance, he says, “seems to have had a substantial impact in terms of the willingness of investors to invest in certain sectors.”

Some industries, however, are finding that Europe’s rules have actually given business a boost. Entrepreneur Jason Currill, an expert in cloud computing, remembers how German companies began telling him they needed to store their data locally instead of on servers in the U.S. They were worried about the USA Patriot Act, antiterrorism legislation that gives the U.S. government wide latitude to demand access to types of data that European laws protect.

So Currill decided to launch a company, Ospero, to help Europeans store their data locally. The company he started now provides cloud computing services in 19 countries and touts the importance of “data sovereignty” in its marketing materials.

Such marketing strategies are evidence that data laws can act as trade barriers, just as tariffs do for industries such as manufacturing. In the short term, that means tougher policies could promote investment, as companies that might otherwise have hosted data outside Europe rush to install local data centers. Building and managing those facilities keeps money, just like data, in Europe.

Even so, the net economic effect of Europe’s data philosophy is difficult to pin down, and many companies contend that trying to legislate fast-moving technology is a bad idea. In a February position paper, Microsoft’s director of privacy in Europe, Jean Gonié, said the region’s challenge is “how to protect Europeans’ privacy while also encouraging innovation and facilitating the productivity and cost-efficiency offered by new computing paradigms.” Although Gonié praised aspects of Europe’s latest privacy proposals, which simplify some requirements, he complains that legislators risk “designing technology and business processes” by force of law.

Tucker says that as long as European and American privacy rules continue to differ, the situation may constitute “the perfect natural experiment” for studying the effects of privacy controls on Internet businesses. She predicts, however, that U.S. rules may drift toward Europe’s privacy-weighted system in the long run “because we think it’s something consumers want.”

It’s even possible that Europe’s stricter requirements may end up becoming de facto global policies for companies that serve audiences in many jurisdictions. That is the case for the Financial Times, says Kristina Eriksson, a spokeswoman for the newspaper. She says the site now displays the same cookie warning in the United States and Europe so that the publication’s audience has a “consistent experience” worldwide; the newspaper hasn’t seen any negative effects on traffic.

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Credits: Tim Brakemeier/epa/Corbis, FT.com

Tagged: Business, Business Impact, business, privacy

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