My new 914 (yeeehaaaa) has a speedo problem, in that when I'm doing around 70mph, it's reading almost 90. The car has 195/50/15 tires. Will the smaller diameter tires make that much difference (25%)???

yes tire size does make a difference. Tire rack has a calculator that will tell % of difference.

Here's an even better tire calculator: Ejelta

It's set up now to calculate sizes compared to a 165/80-15, which is about what a 165SR-15 (the stock tire) will come to. A 195/50 is nearly 11% off. OEM speedos are frequently off by 10% or more, even with the correct tire size. They're also often not off by the same amount throughout their range. For example, the speedo in my Type 3 is exactly correct at 70mph with its current tires (according to a handheld GPS), but it's way off at 30mph (30mph indicated is 25mph actual).

My 914 speedo is about 5% off at high speeds, and 10% off at low speeds. I use 195/65 tires, which are within 2% of correct.

Note also that even the calculated numbers are going to be approximate, as actual tire sizes are rarely exactly what the sidewall says they should be.

Many thanks. I fugured it was a combination of speedo error & tire size, but a 25% error just seemed like a whole lot for just these two factors.

195/50-15 tires are WAY short But also WAY funner. watch the speed bumps.
and you can probably pull 5600 RPM in 5th.