Digital firms often innovate within legal frameworks outpaced by technological advancements, where the ability to navigate this mismatch can be key to achieving a competitive advantage. This challenge is exacerbated when a firm enters a highly regulated ecosystem. In this study, we set out to explore the relationship between regulations and product innovation, where we focus on how software firms decide to develop and update their products as a key innovation activity. We are departing from viewing the relationship between regulator and regulated as dyadic, and investigate the role of other stakeholders in this relationship. We ask the following research question: how does emerging regulation impact product innovation in an ecosystem over time? We employ a longitudinal case study approach, following a large digital health software provider in Europe since its inception in mid-2010s until now. Our findings point to co-evolution of regulations and the firm’s product development within the healthcare ecosystem, which occurs through continued decoupling and recoupling of product development from and to the regulations. This bi-directional interaction highlights the need for a nuanced understanding of the evolving interdependence between legal frameworks and innovation in digital ecosystems. Our study aims to contribute to the discourse surrounding the governance of digital ecosystems, informing policymakers, scholars, and industry stakeholders alike.
