nowEurope

This morning while reading an OECD survey of the Hungarian economy I came across an interesting admission. Among other elements of the Hungarian economy, the report described Hungary’s efforts to encourage innovation, which for the most part the OECD views favorably.

This is the bit that caught my attention:

“[M]any documestic manufacturing firms operate on a relatively small scale, often probably too small to warrant formal R&D activities. Though these firms may indeed be innovative, and may benefit from spillovers in knowledge and know-how from the large high-tech producers, these processes probably do not get fully recorded in statistics on innovative activity.”

That description exactly fits my last employer, Indextools. It also describes the dilemma policymakers face trying to reproduce this kind of success.

In my experience (and I mean career experience) a great deal of innovative activity comes from tiny startup companies like Indextools. When I joined the company in early 2004, it consisted of ten Hungarian developers, the founder and an extremely harried Australian woman who handled all of the sales, support and marketing communication. And yet the company was already beginning to compete against North American heavyweights in the Web Analytics industry.

Founded in 2000, Indextools started life as free web traffic counter developed by two young Hungarian friends, Marton Szoke and Peter Galantha. The two developed their service into a commercial product providing performance statistics to webmasters. With a fanatical dedication to developing their product, Indextools was able to address more and more sophisticated customers.

Meanwhile, Indextools? competitors in other markets were undergoing a similar evolution. The difference was that many of these companies had easier access to venture capital (for example Websidestory) while others had the advantage of being geographically near to key customers (Webtrends, Coremetrics and others).

At first glance you might assume that Indextools? chief advantage is cost. I would argue that the quality of the programming talent available to Indextools is also a big factor as well as, in particular, the savvy determination of the founders to develop their product. In 2005, the major differentiator in among web analytics vendors was the sophistication of each company?s feature set. Indextools was able to compete against larger, better-funded organizations operating in more sophisticated markets, based mainly on the company?s ability to continually innovate.

The irony, of course, is that Indextools isn?t even on the map of innovation policymakers. The company doesn?t employ an R&D staff because, in fact, the entire company is dedicated to product research and development. Nor is Indextools likely to apply for a Hungarian grant or a European Commission project. The application process is too complicated and bureaucratic for small, innovative companies like Indextools, which would rather put every spare moment of time into competing and winning new business.

I think one solution is publicize companies like Indextools and make them examples for others to emulate. Another approach is to make Hungary a better environment to do business ? for example by lowering the ludicrously high employee taxes business owners pay in this country. I hope to explore these and other themes in my next few posts.