Declining competitiveness could drive foreign investment out of the Republic to more competitive EU accession states such as Estonia, according to the latest edition of the World Competitiveness Report.

The research, compiled by the Swiss-based International Institute for Management Development (IMD), shows that the Republic is no longer among the top 10 most competitive smaller economies in the world and warns that it could, along with Portugal, face competitiveness challenges from the next wave of EU member-states.

The IMD has found that many of the 10 states due to join the EU next year will have a lower cost structure and salary base than the European average.

"As a consequence, some transfer of economic activities, especially in assembling and manufacturing, is likely to take place within the European Union," the school notes.

"Relocation of industrial and service activities will now take place within Europe," said Prof Stéphane Garelli of the IMD, director of the World Competitiveness Report, upon the publication of the research.

The report finds that the global economic downturn has hurt the Irish economy more than most, pushing it from ninth to 11th place in the competitiveness rankings.

The fall continues a downward slide that began in 2001, when the Republic was the fifth most competitive smaller economy in the world.

This year's drop came in all four areas that contribute to competitiveness: economic performance, government efficiency, business efficiency and infrastructure.

The Republic fares particularly poorly on its high inflation, taking 25th place out of 29 economies with fewer than 20 million inhabitants.

It also falls down on infrastructure, taking 29th place for both physical infrastructure and internet access. The Republic's infrastructure planning is also judged to have been the poorest.

On a positive note, both Irish corporate taxes and investment incentives are the most attractive in the list of 29.

The US remains the most competitive larger economy in the world, while Finland has replaced the Netherlands at the top of the smaller country rankings.

The IMD singles out the Republic and Switzerland as examples of smaller states where a weaker global economy has been particularly damaging.

"In general, smaller nations are more vulnerable to a weaker economic environment," the IMD remarks.

Among the 59 regions and countries analysed in the report, the Republic is among just four that saw their economic growth shrink in 2002.

The IMD takes this as a signal that the world economy is not in recession, but is suffering instead from "economic anaemia".

Prof Garelli described this condition as "more pernicious and just as bad".

In general, the IMD's researchers believe that European economies are "plagued by overregulation and complexity".

"Cost is certainly part of the competitiveness problem of Europe. However, the ability to simplify structures and to increase transparency in policies is also a major challenge, which has to be tackled," the report finds.

It predicts that the 15 states of the EU will grow by just 1 per cent this year, noting that economic recovery has been delayed by restructuring in both the IT and financial sector.

The IMD also points to dollar weakness as a potential drain on the global economy, as the US becomes a "massive consumer of loans in international markets".