Kenya’s Senate has approved legislation that if enacted would compel startups to allocate at least 15% of their budget to research and development (R&D) and require wholly Kenyan ownership to qualify for legal recognition, tax breaks, grants, incubation programmes, and credit guarantees, TechCabal reported on January 22.

Critics argue that the local ownership clause in the 2022 Startup Bill, which now awaits President William Ruto’s assent, risks excluding startups with foreign founders or investors, a key segment of Kenya’s entrepreneurial growth.

Such exclusions could deter international venture capital, which played a crucial role in the $638mn raised by Kenyan startups in 2024, as reported by Africa the Big Deal.

The Startup Bill exemplifies a growing trend in emerging markets to balance domestic economic empowerment with the need to attract global investment. For international stakeholders, it raises critical questions about how developing economies can foster local innovation without alienating the foreign capital that often fuels technological and business growth.

The legislation also introduces tax incentives aimed at strengthening the business ecosystem, alongside support for incubators, accelerators, and investors. Additionally, a startup fund is to be established to provide critical financial backing, helping grassroots innovators scale and thrive.

Startups would also be required to maintain proper records and submit annual reports, promoting accountability while benefiting from the Act. Penalties for non-compliance have been outlined to ensure fairness and uphold startup rights, Fintech News reported on January 20.

The bill also grants the Registrar of Startups authority to oversee compliance, including monitoring venture funding and research initiatives. This accountability measure, while well-intentioned, has sparked concerns about increasing operational burdens for nascent businesses.

Likewise, while the 15% R&D spending requirement has been lauded for fostering long-term innovation, some experts believe it could be counterproductive for startups operating on tight budgets. Steve Okoth, a tax director at BDO East Africa, described the measure as a way to “institutionalise” innovation but cautioned that it may “strain startups” unable to divert resources from immediate needs.

“A more flexible, incentive-driven approach… would be more effective in fostering sustainable innovation and growth,” Okoth told TechCabal.