BISCHOFSWERDA, Germany - Sjouke Zijlstra bounded up the stairs at Waterloo, Ont.-based Arise Technologies' new German plant, punching air. He turned the corner and gestured to a huge factory bay, which was barren except for one photovoltaic solar cell production line, manned by uniformed employees.

"This may not look like much now," said Mr. Zijlstra, the general manager of the factory. "But soon this whole place will be buzzing." The plant, which is located just a few kilometres from the Polish border, officially opened earlier this month.

It could not be coming on-stream at a better time. Germany, which has only limited fossil fuel resources, leads the world in developing renewable energy systems. Lately, spurred by government incentives, wind and solar farms are popping up across the country. And suppliers, such as Arise Technologies, are pouring in to provide the components to build them.

According to the German Solar Association, 100,000 solar systems were installed in the country during 2006 alone. Not surprisingly, demand for solar cells -- including the 6" x 6", four watt models Arise produces --is exploding.

"There is a lot of competition in our industry," Mr. Zijlstra said. "But right now there is room for everyone."

Arise Technologies isn't the only Canadian small business that is gearing up its efforts in Europe. Stung by the rising loonie, which is increasingly hampering the competitiveness of Canadian exports to the United States (which absorbs the lion's share of exports from Canada), many SMEs are diversifying.

According to the Department of Foreign Affairs and International Trade, Canadian merchandise trade with the 27 countries of the European Union shot up to $35-billion last year from $20-billion in 2003.

Germany has been among the biggest winners of those increased trade flows. During that period, Canadian trade with Europe's largest economy rose to $3.9-billion from $2.9-billion.

Canadian companies have long been attracted to the huge European economy, said Christopher MacLean, a senior trade official at the Canadian embassy in Berlin. However, not many achieve the same success there as they do in the United States.

Businesses appear to be using different strategies in the two markets: "Canadian companies that sell to the United States tend to export directly there, as opposed to selling through their U. S. affiliates," Mr. MacLean said. "However, sales in Europe by European affiliates of Canadian multi-nationals, are more than twice the level of Canadian exports to the European Union."

The reasons for this can vary. For example, Marc Suys, general manager at St-Laurent, Que.-based 5N Plus, which supplies material compounds, notably cadmium telluride, to the solar power industry, said proximity is a key consideration.

"There are environmental factors at play in many of the compounds we sell," he said. "As a result, we provide extensive recycling services to our clients. And to do that effectively, it helps to be near them."

In addition, Germany offers substantial assistance to manufacturers that set up shop in the eastern part of the country. 5N Plus's plant in Eisenhuttenstadt, which is scheduled to be in full operation by mid-summer, is one such beneficiary.

Much of the former German Democratic Republic (as East Germany used to be known) is still recovering from decades of Soviet occupation and high unemployment remains a problem.

Mr. Suys, though, is unconcerned. "This area has excellent infrastructure and a good, readily available workforce," he said. "Furthermore, labour costs are not a major component of our products. So there is little temptation to locate across the border in Poland, where salaries are lower."

The German government's substantial support of the solar power industry is a main attraction of setting up shop in the country.

"Generating electricity from sunlight costs more than producing conventionally," Mr. Suys noted. "To encourage development the German government has promised to buy all solar power that is produced in-country at a fixed price. And when we started to see solar farms the size of football fields popping up, we knew that there was a major opportunity."

But Germany's solar industry is not the only sector doing well. Lately, the economy as a whole has been climbing. After a sluggish 2007, German real gross domestic product jumped an eye-popping annualized quarterly rate of 6.3% in the first three months of 2008, its fastest pace in 12 years.

And while growth rates in many countries of "Old Europe," appear weak on paper, much of this is because populations in many of those countries are not growing. However, on a per capita GDP growth basis, countries including Germany are doing just fine, as is household spending power.

The solar power industry is in many ways emblematic of many sectors in Germany that have been doing well: growth is centred in knowledge-based and high-value added initiatives. One expert who understands this is John Hudson, president and chief executive of EEDO, a supplier of learning content management systems to German customers, which recently expanded its presence in Berlin.

"Because labour costs and efficiency can be so high there, businesses and governments place a lot of emphasis on effective teaching and training solutions," Mr. Hudson said. "As a result, we have seen considerable demand for many of our software applications, particularly in knowledge-intensive industries such as aerospace and defence."

Arise Technologies' Mr. Zijlstra agreed. The veteran general manager is highly optimistic about opportunities for adding knowledge-based value to Germany's economy, especially to its solar power industry.

"Right now we are producing using commercial off-the-shelf techniques. And the next production run will be off-the-shelf as well," he said.

"But after that we will be introducing improvements that will boost product performance. When the Germans say they are going to boost alternate energy sources, they really mean it."