INNOVATION:Unless there is a massive increase in funding for education and research, Ireland will face an innovation emergency within a decade, writes DEREK SCALLY

FOR YEARS, Ireland's economic success was the subject of curiosity and no small amount of scepticism in Germany.

Economists cast a jaundiced eye over the record-breaking figures emerging from the island, whispering that it was all too good to be true.

Now, as the downturn takes hold, economists at Germany's leading economic institute warn that Ireland is poorly equipped for a less certain economic future.

The German Institute for Economic Research (DIW) has suggested that unless there is a drastic increase in funding for education and research, Ireland will face an innovation emergency within a decade.

The warning came during the presentation in Berlin of the annual Innovation Index survey, conducted by the DIW for the Deutsche Telekom Foundation and the Federation of German Industries (BDI).

The survey, one of the most detailed of its kind in Europe, evaluates existing OECD and national data in all areas that affect a country's innovative capacity.

As well as the obvious - research and development spend, for instance - researchers analyse "soft" factors such as attitudes among managers and consumers, the networking possibilities available and the financing climate.

This year's survey showed that Sweden is the country with the greatest capacity to innovate, followed by the US, Switzerland and Finland. Britain was seventh, one place ahead of Germany. With 12 European counties on the list of 17, Ireland was third last in 15th place, ahead of Spain and Italy.

The only areas where Ireland did well, in second and third place, were the sub-categories of "risk-taking" and "women in third level" respectively. Although the survey's main focus was assessing Germany's innovative performance, DIW economists say that the data on Ireland attracted "considerable interest" in their

offices. Their eye was drawn to what they describe as a core contradiction in Irish economic data: in this comparison of 17 countries, Ireland spends the least on education, and fared badly in comparison on research and networking opportunities.

Yet at the same time, the data shows Ireland leading the pack when it comes to value of goods created per head of population.

After much head-scratching, the researchers concluded the data from Ireland attributes to the Irish economy the full value of high-tech goods produced on the island, but developed elsewhere.

"We've watched this rocketing data for years and assumed for a long time that what we were watching was a unique statistical feature," says Dr Heike Belitz, researcher in the DIW's innovation, industry and services department. So, is Ireland taking credit for others' innovation?

DIW researchers seem to think so: the low spend on research and the low level of patent registrations in Ireland suggest that Ireland is not as innovative as it likes to think.

The innovation index suggests that merely average performance in the areas of business financing, competitiveness and implementation are dragged down even further by extremely low results in education, research and development and networking opportunities. "These future indicators suggest that, without a huge education spend, things will get difficult in 10 years. But it appears that Ireland missed the opportunity to invest money when there was money around," says Belitz.

The DIW research report suggests that, despite Ireland's recent economic success, poor choices made in crucial innovation-influential sectors mean the country is still in a "catch-up" development stage.

"It was a similar picture in South Korea in the 1970s, but when their boom came, they invested in education," says Belitz.

There is no Irish equivalent of the innovation index produced to hold against the German research. The European Commission "Innovation Scorecard" for 2008 places Ireland in the second tier of countries as an "innovation follower", with an average score. According to a 2007 Forfás report, some 47 per cent of Irish companies with 10 or more employees indicated that they were "active innovators", but the distinction between home-grown and imported innovation is not immediately clear.

The Forfás "Statistics at a Glance" 2008 report suggests a growing gap in research and development spend between Irish and foreign companies operating in Ireland. Whereas foreign companies almost doubled their R&D spend between 1999 and 2005, Irish companies increased research spending by just 37 per cent.

Forfás is currently producing an international benchmarking report, due in early 2009, that will present new detailed sectoral data, and also look at different modes of innovation, in particular the non-technological side.

Critics of Ireland's approach to innovation will see some of their arguments confirmed in the German report, such as high third-level participation that produces conveyor-belt graduates and masks underfunding of the primary and secondary sector.

The DIW's yellow card for Ireland's innovative ability comes at a time of heated debate in Irish third-level institutions about the most suitable focus for innovation funding.

Some academics argue that there is now a risk of over-emphasis on science and technology at the expense of developing the connections between innovation and implementation

It's a concern raised four years ago by the Enterprise Strategy Group (O'Driscoll) report which highlighted the danger of pushing manufacturing of advanced technology with no outward view to the market.

Frank Devitt, senior lecturer in entrepreneurship and head of the department of electronic engineering at NUI Maynooth, argues that only with the right balance of innovation and implementation can Ireland produce a home-grown Apple or Nokia.

Only then can Ireland hope to join EU member states like Finland and Sweden at the top of innovation indexes with companies that don't just innovate but specialise in connecting other people's innovations into unique, innovative products.

"The reason we don't have an Irish Apple or an Irish Nokia," says Devitt, "is that we don't have a culture of looking to the market and looking to users."