Which is the most innovative country in Europe?

European Commission measures nations' standings in technology exports, innovation, R&D, and broadband usage

Could Malta, a little island nation with a population of 400,000, be the most IT-savvy country in Europe?

Well, it all depends how you measure it. Technology exports, innovation, research spending, or broadband usage: all skew the answer in different directions. Scandinavian countries lead in telecommunications deployment, Germany in patent awards, and others in technology exports.

For instance Malta, a member of the European Union since May 2004, derives a greater proportion of its export revenue from high technology than any other European country, according to figures from Eurostat, the statistical service of the European Commission. High-tech goods and services accounted for 55.9 percent of Malta's exports in 2004.

In Ireland, where the government has worked hard to attract pan-European manufacturing, distribution and service operations for IT manufacturers including Apple Computer, Dell, and Intel, high technology only accounted for 29.1 percent of the country's exports. In comparison, the U.S. gained 27 percent of its export revenue from high technology and Japan 22.8 percent.

For the U.K. the figure is 22.7 percent, and for France 20 percent, with Germany trailing at 14.8 percent.

Eurostat's definition of high-tech encompasses more than just computers: It also includes the manufacture of consumer electronic devices, pharmaceuticals, medical instruments and aircraft. The service side is almost exclusively IT-related, though: it includes telecommunications, computer and related activities, and R&D (research and development).

Malta's high-tech industry is a giant in another surprising sense: production value or, roughly speaking, sales. Its manufacturers generated annual average production value of €21 million ($25 million), according to figures from Eurostat for 2002, the most recent year for which data is available. The average is pulled up by the activities of a few big companies, including the Maltese subsidiary of automotive switch and sensor maker Methode Electronics Inc., which contributes annual sales of around €44 million to the group, and the Maltese division of ST Microelectronics, which claims to be the island's biggest exporter.

Let's keep things in perspective, though: Malta has fewer than 290 high-tech manufacturers (for this country, Eurostat lumps high-tech manufacturers in with makers of bulk chemicals, machinery and motor vehicles) but Italy has over 34,651 of them, making it the country with the most high-tech manufacturing companies in Europe. That's almost twice as many as Germany, and represents 6.3 percent of the country's total manufacturing companies. However, despite being more numerous than their German counterparts, the Italian companies were much smaller, with average production values one third or less of those in Germany.

Where Germany excels is in the proportion of its manufacturing businesses that are in the high-tech sector.

Of Germany's 196,702 manufacturing companies, 19,346 or 9.8 percent were in the high-tech sector in 2002, ahead of the average of 6.3 percent for Europe's 25 member states (although only 15 of them were members at that time the statistics were gathered).

Curiously, though, Germany's high-tech manufacturers generated slightly less production value than their low-tech counterparts, with both categories averaging between €6 million and €7 million.

The U.K.'s 11,866 high-tech manufacturers, 7.2 percent of the country's total, were more productive, with average production values of almost €10 million each, compared to €4 million for the country's non-high-tech manufacturers.

France, too, had a productive high-tech manufacturing sector: its 16,188 high-tech manufacturers (6.5 percent of the total) had average production values of almost €9 million, while the rest of its manufacturing sector struggled to reach €4 million on average.

The relatively high production value of Germany's non-high-tech manufacturers compared to the U.K. could be due to the disappearance of Britain's traditional heavy manufacturing industry, and that country's subsequent move into the service sector.

Britain's high-tech ambitions manifest themselves more in services than in manufacturing. Although the U.K. and Germany had about the same number of service companies per capita (499,587 for Germany, 425,819 for the U.K.) 19 percent of Britain's service sector is involved in high-tech knowledge and information services, compared to 4.4 percent in Germany.

Spending on R&D is one way in which companies -- and countries -- stay ahead of their market. Average spending on R&D was 1.9 percent of gross domestic product (GDP) in the E.U. in 2004, compared to 2.59 percent in the U.S. and 3.15 percent in Japan, according to Eurostat. In Europe, 54 percent of that expenditure was financed by businesses, and the rest by governments. In the U.S., 63 percent of R&D was financed by business, and in Japan 75 percent.

By 2010, the European Commission wants European R&D spending to reach 3 percent of GDP, with two-thirds of that financed by industry,

So how are the various European countries approaching that goal?

The Scandinavian countries are closest: Finland spent 3.51 percent of GDP on R&D in 2004, and its expenditure is growing by 4 percent a year in real terms. In addition, over two-thirds of the money comes from industry. Sweden spent a greater proportion, 3.74 percent, on R&D, but its spending is shrinking by 2.1 percent a year in real terms. Nevertheless, it's met the target of two-thirds of spending from businesses. Denmark's R&D budget of 2.63 percent of GDP is rising by 4.3 percent a year, with around 61 percent of it privately funded.

Germany's R&D spending is not too far behind that of Denmark, at 2.49 percent of GDP or €55.1 billion, with two-thirds of it coming from industry, but that spending is only growing at 0.8 percent in real terms, not enough to bring it up to 3 percent by the 2010 deadline.

French spending is growing equally sluggishly, hovering around 2.5 percent of GDP, half of it from industry.

The French hope to boost the proportion of private-sector funding by offering financial incentives to state-run laboratories to seek it out. The initiative will brand participating research centers as "Carnot" laboratories (after a French statesman and scientist), and is modeled on the German network of public-private funded Fraunhofer research institutes. Starting next year, the French Ministry of Research will offer additional government funding to laboratories that win research contracts from industrial partners. The funding will be related to the number of private sector partners the labs find, with an initial budget of €40 million devoted to the project.

The U.K. has not yet published figures for 2004, but for the last few years it's been hovering just below the E.U. average of 1.9 percent, less than half of it privately funded.

(This is one area where Malta is setting a poor example, with R&D spending at just 0.29 percent of GDP, and most of that funded by the government.)

The effects of R&D spending by companies and countries are harder to measure. The European Commission has just published the 2005 EU Industrial R&D Investment Scoreboard, which compares the performance of the top 700 R&D investors based in the E.U. with the top 700 investors based elsewhere. A preliminary analysis ranking the 200 or so IT and telecommunications companies included in the survey by the ratio of R&D spending to net sales, and by the ratio of net profit to net sales, shows no obvious link between the two: none of the top ten companies for profitability are among the top ten for R&D spending, nor are the poorest spenders among the companies with the worst profitability. Of course, there can be a significant lag between when a company begins spending on R&D, and when it reaps the fruits: this kind of simplistic ranking can only work in an industry where companies have been investing at the same rates for a decade or more so in the technologies they are now selling.

If today's profits are no guide to the effectiveness of today's R&D programs, how else can we measure innovation? One way is to look at the number of patents awarded for new processes and technologies, the more immediate fruits of researchers' labors.

When it comes to judging Europe's IT industry, though, there are some flaws with this measure, as much of the innovation is in software. The patentability of software is still something of a gray area in Europe, following the European Parliament's rejection in July of a proposed directive on Computer-Implemented Inventions.

Nevertheless, researchers are finding plenty of scope for patenting inventions in the fields of computing and electronic communications techniques, though. Between 2000 and 2004, the number of European patents awarded in those fields by the European Patent Office (EPO) almost doubled, from 2,819 to 5,615. Of all the European countries, Germany won the most, with 741 IT patents. Second was France, with 466. Finland received 288, the U.K. 238 and Sweden 221.

However, European countries are but small players in the European patent game. In 2004, the European Patent Office granted 1,749 IT patents to U.S. applicants, and 1,192 to Japan. Those two countries together accounted for almost two-thirds of the European IT patents awarded in 2000, although by 2004 this proportion had slipped -- to just over half.

The German Federal Ministry of Education and Research notes in a report on Germany's Technology Performance in 2005 that patent awards for information and communication technologies are slowing in Sweden, the U.K., the U.S. and Japan, although Finland seems not to have been touched by this slump. Germany's patent applications have not, traditionally, been in such cutting-edge fields, although the country is increasingly moving in this direction, as this is where there is the greatest opportunity for global growth, the Ministry notes.

For this growth potential to be fulfilled there must be more investment in broadband communications infrastructure, the Ministry notes.

There's plenty of work to do: while Denmark had broadband penetration of around 18 percent at the end of 2004, and Finland, Sweden and Norway hovered around 15 percent, according to IDC report published in June, the figure was nearer 10 percent for France and the U.K., and less still for Germany.

Admittedly, France has deployed a lot of broadband connections in 2005, and the rankings could change -- but that just goes to show that trying to measure the most IT-savvy country in Europe is like trying to hit a moving target.

Nancy Gohring, in Dublin, and Jeremy Kirk, in London, contributed to this report.

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