* Poland is EU's growth leader but lags on innovation
* Low-cost economic model running out of steam
* Creating hi-tech economy key to long-term prosperity
By Marcin Goettig
WARSAW, Oct 28 Reuters) - Polish scientist Miroslaw Grudzien built the infra-red detectors that NASA uses to explore Mars, but getting a business development loan nearly defeated him.
His firm, which made sensors on the U.S. space agency's Mars rover Curiosity, sought financing from banks for a new production facility. Because the loan was to be partly paid back from European Union funds, the government had to sign off on it.
In the end, Grudzien got his money, but it took a year, forcing his company, VIGO System, to delay the launch of a new range of high-technology sensors.
"Civil servants do not care if I get the credit today, in a year or in three years. They do not have a clue that in modern technologies one year of delay in financing can mean defeat," Grudzien, the firm's chief executive, said.
Such stories are common in Poland. The biggest economy in eastern Europe, it has seen two decades of vigorous economic growth and yet -- based on several different measurements -- is one of Europe's least innovative economies.
Up to now, that has not been a problem. It has thrived on attracting low-value-added businesses such as television assembly plants and off-shore accounting- and call-centres.
However, that type of economy depends on low costs. This advantage is being eroded by rising living standards which last year reached 65 percent of the EU average.
Long-term, underlying growth, meanwhile, has already slowed to 3 percent from 6-7 percent four years ago, the central bank estimates.
To compete in the future, Poland will need to replace its low costs with innovation.
The government says it is working on that. "The time has come to invest more heavily in policies that support development ... the state will stimulate these policies very heavily," said Science and Higher Education Minister Barbara Kudrycka.
But Poland has a long way to travel if it is to catch up on its more innovative competitors.
It filed 8 patents per million citizens to the European Patent Office in 2010, Eurostat data show, one more than Greece's 7 and compared with an average of 108 in the whole European Union and 266 in Germany.
Unless Poland turns itself into an innovative, knowledge economy, it risks heading down the same path as Spain, Greece, or Portugal, said Maciej Bukowski, head of the Warsaw-based Institute for Structural Research (IBS).
Those countries experienced rapid growth but failed to shift in time the structure of their economies away from low-cost industries. Now they are wealthier and their costs have gone up, they struggle to find a niche in the world economy.
"These counties share a few characteristics. One is a very low level of research and development spending and innovation in general. Another is a bad regulatory environment and the third one is a rigid labour market," Bukowski said.
"Poland has all those three characteristics... This is something that the politicians do not take account of."
The statistics show just how poor Poland - in common with many of its neighbours in eastern Europe - is at innovation.
Poland ranked as the EU's third least innovative economy in 2012, with a worse result recorded only by Greece and Romania, a report by World Intellectual Property Organisation's showed.
The country spent 0.74 percent of gross domestic product (GDP) on research and development (R&D) in 2010, much less than the 2 percent on average in the EU.
People involved in Polish science say when Communist rule collapsed two decades ago and was replaced by a market economy, few people wanted to invest in research projects that might never make money when they could just import foreign technology.
The result now is a system that fails to support innovation: Universities do not cooperate well with business, the state does not encourage companies to take risks by developing their own technology, and thickets of red tape stifle activity.
Zbigniew Luczynski, the head of the Institute of Electronic Materials Technology (ITME), a state-owned research centre, has spent years wrestling with these problems.
His institute discovered a new method to produce the one-atom thick film of carbon known as graphene, which was classified as one of the nine most interesting findings in the field in 2010-2011 by technology consultancy Future Markets.
The material is stronger than diamond, transparent and conducts electricity, which could make it a perfect material for touch screens for smartphones.
Luczynski described how his institute has been seeking for nearly two years to get state funding for equipment to help with research on graphene.
And he said his institute was barred by the Economy Ministry, which oversees it, from entering a joint-venture with a foreign investor to commercialise graphene.
"It is a choice of the state, whether the things we do have an impact on the economy. For now it seems the state does not really care," Luczynski said in his office in the institute.
Asked by Reuters about the delay in funding, the Science Ministry said it had given ITME around 60 million zlotys ($19.06 million) for research programmes and equipment. The Economy Ministry said it blocked the venture because the agreement to set it up contained legal irregularities.
Kudrycka, the science and higher education minister, told Reuters the government was doing something about the problem.
Warsaw plans to increase research and development spending to 1.7 percent of GDP by 2020, a more than twofold rise though still below the EU's three percent target. The state has promised to spend 10 billion zlotys between now and 2015 on scientific infra-structure.
The government has also announced a 1 billion zlotys research programme into shale gas extraction, and Kudrycka said firms should be able to write-off 1 percent of their tax bill from 2014 if they direct the money to research.
"I cannot say that this is a civilisational leap, but regulatory and systemic changes will allow Poland to surprise many countries. This requires five, maybe 10 years," Kudrycka said.
Shortcomings in the education system are a big part of Poland's lack of innovation.
Poland's best universities rank outside the top three hundred academic institutions globally, the Academic Ranking of World Universities shows. Many of the most promising researchers take posts at universities abroad.
"I'm afraid that if I returned here it would mean an end of my academic career," said Karolina Safarzynska, a Polish economist working at the Vienna University of Economics.
"Publishing articles in local science journals is not enough" she said. "The Polish educational system promotes mediocrity and conformism."
Salaries also offer little incentive to pursue a scientific career in Poland.
"I did not consider staying in Poland for my PhD studies because of financial grounds," said Marta Luksza, a computational biologist who graduated from Warsaw University, earned a PhD in Berlin and now works at Columbia University in the United States.
"Back then you received 1,000 zlotys per month and you also had to teach students. In Germany you received 1,300 euros, but you were not required to teach and could cover your expenses with this money."
One of the most vocal supporters in Poland of a more innovation-centred economy in Michal Boni, minister for administration and digitalisation.
His job includes trying to get internet technology into schools and offices and encouraging firms to embrace the knowledge economy. Yet even he expresses frustration at the slow pace of change.
"I think that Polish political elites have not grown up enough to place innovation at the centre stage. Our political debates resemble those from the 1960s. Nobody debates such issues here," he said in an interview.