A new report from The App Association, “The Hidden Cost of AI Regulations for EU and UK Startups and SMEs,” highlights the economic drag that heavy-handed AI rules are creating across Europe’s tech ecosystem. This report draws on surveys commissioned by The App Association and conducted by TechnoMetrica of more than 1,000 micro, small, and medium-sized enterprises (MSMEs) across the EU, UK, and U.S., sampling both AI users and developers on adoption perspectives and policy impacts. The consequences of overly broad AI regulations serve as a clear warning for U.S. policymakers to pursue an innovation-friendly agenda that promotes competition and startup growth in the AI sector.

Europe’s AI Rules Are Stifling Startup Innovation

According to the App Association report, Europe’s startups, scaleups, and small technology firms are increasingly constrained by its strict, ex-ante regulatory models. Laws such as the EU’s Artificial Intelligence Act (AI Act), the General Data Protection Regulation (GDPR), and the Digital Markets Act (DMA) preempt a real assessment of harms versus benefits, restricting access and front-loading compliance.

— Morgan Reed, president of The App Association, criticized the European approach by stating that “at the same time Europe is saying they want more competition, they’re creating an environment that makes it less likely.”

— George Mason University’s Mercatus Center echoed the same point in a March working paper. It argues that preemptive antitrust interventions and GDPR-style data/property rules would “do more harm than good” by creating costly barriers to entry, particularly for startups.

The App Association report further quantifies the negative relationship between burdensome AI regulation and startup growth.

— The report points out that regulations are slowing firms’ AI launches: “58 percent of developers report regulation-driven delays […] For those caught in these slowdowns […] half report slower innovation, 45 percent face higher costs, one in three falls behind competitors, and nearly 30 percent lose clients.”

Together, these delays and financial setbacks show how overly restrictive regulations hinder AI innovation and competitiveness.

U.S. Regulators Risk Repeating Europe’s Mistakes

For U.S. policymakers, these findings are a clear warning that regulatory overreach stifles innovation. In fact, the findings suggest a trend is forming: 44% of U.S. MSMEs report AI launch delays tied to regulation.

As the FTC and DOJ intensify their focus on AI partnerships, data concentration, and market dynamics, emerging frameworks must strike the right balance between safeguarding competition while remaining workable for smaller innovators. Broad or prescriptive compliance mandates, such as expansive disclosure or audit requirements, could unintentionally place a heavier burden on AI startups that lack the legal and regulatory resources of larger companies. Sustaining competition depends on a balanced and clear regulatory framework and the continued growth of these smaller AI players.

— An article from CCIA this March reinforces the need to “(avoid) unnecessary regulatory burdens that could raise entry costs” for AI startups. Today’s AI market—where startups and bigger firms all compete—shows that preserving, not preempting, these dynamics is the best path forward.

Compounding this risk, the fragmented patchwork of state-level AI regulations is creating uncertainty and higher costs for small developers. This year, states have introduced over 1,000 AI-related bills, many with inconsistent definitions, reporting requirements, and enforcement mechanisms. Large incumbents can have legal teams to navigate this maze; startups cannot. By contrast, predictable and consistent regulation strengthens competition and encourages innovation, allowing AI players to invest in development rather than compliance.

— The International Center for Law and Economics describes such a fragmented AI regulatory system as “disproportionately harm[ing] smaller firms and startups by creating significant entry barriers and reducing market competition.”

Without consistent standards, the U.S. risks mirroring Europe’s regulatory pitfalls—creating an environment where compliance, not innovation, determines who succeeds. Federal pre-emption would help ensure uniform, innovation-friendly rules across states, preventing a fragmented landscape that disadvantages startups.

Smarter Oversight Can Protect Competition and Growth

Recent research emphasizes a key takeaway for U.S. policymakers: smart AI regulation strengthens competition by differentiating between risk management and innovation control, and giving industry clear and proportionate guardrails within which to operate.

— CCIA Senior Counsel for Innovation Policy Josh Landau emphasized the importance of innovation and competition in the AI sector. “When it comes to AI technology that will become an ordinary part of the process for innovation and creation,” Landau stated, “it is crucial that U.S. companies are able to compete.”

While the U.S. continues to explore guardrails for transparency, data access, and algorithmic accountability, policymakers should avoid replicating the EU’s prescriptive approach. Instead, a targeted, pro-innovation framework will maintain competitiveness and dynamism in the AI market and ensure the U.S. maintains its global leadership in AI development.