domestic economic performance than gdp measures because they exclude the substantial profit outflows of foreign - owned firms. a number of factors contributed to high productivity growth in this country during the 1990s including inward fdi flows in high - technology sectors and past investments in education and physical capital, which boosted the technological and innovative capacity of the irish economy. while, at a sectoral level, productivity growth over the past 15 years has been particularly strong in the manufacturing sector, this finding needs to be interpreted with caution for a number of reasons. first, high productivity in irish industry is largely a result of extremely high productivity levels in a small number of foreign - owned firms, mainly in the pharmaceuticals and ict sectors. these high productivity levels largely reflect rewards for r & d effort and marketing by the parent company and should more correctly be attributed as a return to factors of production in the country of ownership. productivity growth and levels have been much weaker in many other sectors of the economy, including the more traditional manufacturing sectors and many parts of the services sector. second, productivity growth in the manufacturing sector has slowed quite significantly over the past two years – from over 14 per cent in 2002 to around 3½ per cent last year. indeed, on a year - on - year basis, productivity growth in manufacturing was actually negative during the first half of 2005. turning to the economy as a whole, productivity levels, measured as gnp per worker, are now only slightly ahead of the eu - 15 average which means that we lag behind the us and many of the higher productivity european economies. as a result, there is still plenty of scope for productivity improvements relative to these countries. the latest data produced by the cso show that in the first half of this year, economy - wide productivity growth was negative. this partly reflects weaker productivity growth in manufacturing and also partly the changing composition of irish output growth towards a higher concentration of output in services and construction – which are generally associated with quite low productivity. having said that, the extent of the productivity slowdown during the first half, as revealed in the preliminary cso estimates, was surprising and is being analysed by the bank. as more data for this year become available, we will get a clearer picture of what ’ s happening. given that ireland is now one of the higher - wage economies, productivity improvements across all sectors, including services, will be essential if ireland is to be competitive in the global economy. empirical studies carried out by the oecd and other international

r & d spending as a percentage of output, is not only very low by international standards but also less than in irish - owned firms. this reflects the fact that multinational firms still tend to undertake most of their r & d activity in the home rather than the host country. however, there is evidence that the r & d expenditures of multinationals have been increasing in some countries – indeed there have been recent high - profile examples of us firms, primarily in the ict and biopharmaceutical sectors, establishing r & d facilities in this country. in order to remain competitive and move the economy up the value - added chain, it will be essential to increase further the amount of r & d carried out in this country and improve the innovative capacity of the economy. there are a number of ways in which higher r & d activity can impact on productivity. first, domestic r & d can have a direct positive impact on the productivity of indigenous firms. second, there is evidence of positive spillovers and technology transfers from r & d active multinationals to domestic producers. third, empirical evidence shows that an economy ’ s ability to absorb imported technology and to benefit from the spill - over effects of the r & d activities of multinational firms will be enhanced by the r & d activity and human skills of indigenous firms. and finally, r & d active multinationals in the irish economy have been shown to be less footloose, more embedded in the domestic economy and create better jobs than non - active r & d firms. selective state supports for r & d activity can be justified by the positive spill - overs that innovation gives rise to and already a range of grants and tax incentives are available to promote r & d. however, the experience of other countries shows that government cannot on its own artificially boost the level of innovation. instead r & d scale must grow organically. the primary role of government should be to create the necessary framework conditions to support innovation, both for domestic and foreign firms. a number of government measures have already been taken in this regard. an effective r & d and innovation structure has been established with the programme for research in third - level institutions, the appointment of a chief science adviser, the launch of science foundation ireland and various research programmes aimed at increasing third level research and promoting co - operation between third level research institutions and the business sector. only last month, the government announced that it had approved a proposal from ida ireland to fund the establishment of a national institute for bio