Upward convergence: digital regulations and digital firms’ internationalization

Abstract Digital regulations are often portrayed as barriers to digital firms’ internationalization because they hinder digital firms’ market penetration and fragment their global operations. We argue, however, that regulations may play a different role for digital firms that internationalize through virtual presence. Leveraging the European Union’s (EU’s) General Data Protection Regulation (GDPR) as context, we examine how the GDPR affects digital products’ penetration in the EU and whether it drives operational fragmentation between EU and non-EU markets. We theorize that the GDPR does not uniformly reduce penetration opportunities; instead, it benefits low data-dependent products and explorative products that differ substantially from firms’ prior offerings. Moreover, building on digital firms’ reliance on network effects, we propose that digital firms may treat the EU as a global benchmark and release EU-penetrated products to non-EU markets, converging upward rather than separating their international operations, thus strengthening the positive association between EU penetration and subsequent non-EU entry. We found support for our hypotheses by analyzing international user-acquisition activities of the top 500 mobile game developers. Our findings contribute to international business research by showing that digital regulations can create new penetration opportunities and act as institutional catalysts that standardize digital firms’ cross-border expansion.