The huge lead maintained by the southern German states (Laender) remains very pronounced even after adjusting for the degree of agglomeration. Of the 85 economic areas defined by far the most innovative are the few centred on Munich, Stuttgart and Wolfsburg. These automotive-driven top clusters have enabled Germany to achieve the goal set in the year 2000 of investing 3 per cent of its economic output in R & D. However, three in four economic areas still fall short of this target. Those around Dresden and Jena are the only positive exceptions to a general innovation weakness in eastern Germany. The major challenge for Germany is to continue catching up with the global leaders in an increasingly intense research, development and innovation race. To achieve this goal, policymakers must improve the business environment so as to enable significant progress in the field of innovation, particularly in rural and eastern German economic areas.