The firm, Ireland's largest farmer-owned food company and the country's third largest food and agri-business provider, said the development centre will be operational by 2007.
Supported by Enterprise Ireland, a government agency responsible for the development of the Irish industry, the new funds will double Dairygold's R&D staff from 15 to 30. Ultimately, the centre will have capacity for a total of 50 personnel.
Ireland's Minister for Enterprise Micheál Martin hailed Dairygold's announcement as a huge boost for the Irish food industry.
"Through Enterprise Ireland linking with third-level institutes and industry, we aim to ensure that the maximum potential is derived from applied research - both in terms of new business establishment and technology transfer," said Martin, reports the Irish Examiner.
Martin added that collaboration between Dairygold, Teagasc and Irish universities will bring food products with additional health benefits to the market, pointing the way forward for future innovation efforts in the sector.
Investment in R&D to formulate innovative food products to capture the burgeoning market for health-positioned foods is deemed essential in today's competitive food industry.
And functional foods have been slated for strong growth in the country. Although such products currently generate sales of approximately €100 million, they could generate more than €250 million in the next five years under a National Functional Foods Forum launched by a government-funded body at the end of last year.