Published Original at the Il Foglio | Europeo
In the early 2010s, Ecuador set out to do something audacious. On a former sugarcane plantation, about two hours north of Quito, the government began building Yachay: a new research university and a “city of knowledge.”
Backed by one billion dollars in public investment, Yachay was meant to leapfrog Ecuador into the knowledge economy by building a self-sustaining flywheel. The university would generate talent, the city would generate jobs, and Yachay would eventually compete with the world’s top innovation clusters.
But more than a decade later, Yachay stands as a cautionary tale of unfinished buildings, churning faculty, and aging supercomputers. What went wrong was not simply bad management or political turnover. The problem was deeper. Yachay was built on a false premise: that innovation clusters can be manufactured from scratch.
But knowledge does not grow like infrastructure. It is a form of capital that must keep on moving to compound. When governments ignore that logic, they end up building technology parks with a “if you build it, they will come” mentality that seldom works. The question is not how much activity a policy produces in its first years, but whether it sets in motion a process that compounds.
Many of the mistakes made by Yachay are not limited to developing countries. Even in Europe, innovation policy often relies on projects that suffer from what might be called funding cliffs: short-term programs with generous subsidies and optimistic assumptions about their self-sustainability. Europe’s regulatory and administrative burden can make this dynamic even more rigid, as researchers and startups often face layers of reporting requirements, eligibility constraints, and fragmented calls that prioritize compliance over growth. Instead of compounding knowledge, institutions learn to master paperwork cycles.
Now consider a different strategy.
During roughly the same period, China doubled down on Zhongguancun, an innovation district in Beijing. Instead of building on cheap, undeveloped land, they focused on a dense area near top institutions, such as Tsinghua University, Peking University, and multiple campuses of the Chinese Academy of Sciences.
But the key difference was not just geographical, but financial. Zhongguancun pushed the idea of “guiding funds,” an instrument that combines public and private capital while providing private investors with the option to buy out the government’s stake at a predetermined price. This creates an even better asymmetric upside for private investors, giving them a strong incentive to enter the fund and scale its most successful ventures.
Zhongguancun is not about building bigger science parks. The success of the “Avenue of the Entrepreneurs” is a lesson about starting from density and pushing a process of capitalization. There is plenty of undeveloped land two hours north of Beijing. Yet China chose to focus on a single street segment. The lesson is pouring fuel not on wet grass, but on the hottest part of the fire.
Sure, not every Chinese science park succeeds. But Zhongguancun shows what happens when policy amplifies existing strengths instead of trying to fabricate them from scratch.
Now, imagine how Yachay could have been done differently. Suppose that instead of sinking millions in buildings with no resale value, Yachay would have instead been a national endowment focused on science and innovation. An endowment designed to pay out four percent annually, and thus, generating forty million dollars a year—not for five or ten years—but in perpetuity. This would be enough to support forty research chairs with budgets of one million dollars each.
Now, a million dollars might not sound like much compared to the numbers thrown around in venture capital or geopolitical circles, but for basic research, this would have been transformative. In Europe, the most prestigious research awards, such as the European Research Council (ERC) grants, provide roughly half a million euros per year in research funding with a horizon of five to six years. Forty perpetual chairs at double that level would represent a significant expansion even for major economies like those in Europe. Moreover, Europe already has the density that Yachay lacked and that Zhongguancun built upon, yet we continue to rely on spending programs instead of building long-term funds or endowments.
The kicker is that in this model, the capital would remain intact. If the program failed, the government would still have its billion dollars, instead of another monument to the “Edifice Complex:” the tendency of some governments to prioritize visible ribbon cutting infrastructure projects over more invisible forms of knowledge “infrastructure.”
Distributive policies spend money to create activity. Capitalizing policies invest money to create knowledge that compounds.
These are lessons we must keep in mind as we mobilize billions across Europe to support our digital and environmental transition.
The lesson of Yachay is not that governments should avoid investing in knowledge. It is that they must invest in ways that allow knowledge to grow, and that accept that this growth follows some laws or principles. Innovation is not built through grand designs imposed on empty land. It emerges from dense ecosystems, patient capital, and policies that reinforce success rather than attempt to manufacture it.
The countries that understand this will not try to build the next Silicon Valley from scratch. They will invest in the places and institutions where knowledge is already taking root and give it the resources to compound. The ultimate test for modern industrial policy is not how much concrete is poured, but whether it sets in motion a process that grows.
César A. Hidalgo is a professor at the Toulouse School of Economics and the director of the Center for Collective Learning, an international research laboratory with offices in France and Hungary. His latest book, The Infinite Alphabet, explores the principles that govern the growth, diffusion, and value of knowledge.