September 13, 2011: 12:03 PM ET
FORTUNE — Singapore’s government has a way of getting what it wants. Fertility rates too low? The Social Development Unit organizes boat-trips to spin romance among the singles crowd. Not enough tourism? The Tourism Board spearheads the development of two casinos and undertakes construction of a massive new sports complex. Too many students studying abroad? The government sponsors Yale to open a campus in Singapore in 2013. Indeed, the Singapore government has been so successful in its social and economic engineering efforts that the World Economic Forum recently ranked the city-state second only to Switzerland in its annual global competitiveness survey.Having mastered efficiency, Singapore’s new pet project is creativity. The country has long had its eyes on Silicon Valley and over the last decade it has implemented plans to more or less recreate the California tech scene in Southeast Asia. At first, Singapore attempted to throw billions of dollars at venture capitalists and private equity firms. Then, seeing too little of that money trickling down to startups, it began funding them more directly. In its latest scheme, the government plans $50 million of direct investment in 100 companies over five years.
The effort appears to be paying off — at least in fostering a fledging ecosystem. Every year, more risk-takers from the West pop up in Singapore with fresh ideas and the need for funding. If a foreign venture appears able to create economic value for the city-state, Singapore rolls out the red carpet and cuts the red tape.The theory is that investment begets investment. Eduardo Saverin of Facebook, for instance, now lives and invests in Singapore. American venture capitalist Dave McClure invested in Viki, Singapore’s most talked-out startup. So did Japanese-American Joi Ito, CEO of Creative Commons and the head of the MIT Media Lab, who also targets the Singapore market via his fund, Neoteny Labs. “If it weren’t for the government’s scheme,” says Ito, “it would be harder for me to take risks.” Part of the government’s investment plan, for instance, partners with a local or foreign incubator and takes the bulk of the up-front risk in an 85-15 equity split, with a few stipulations like location and regional hiring.Generous funding is important to fledgling companies. But ideas may matter even more. As Singapore’s startup project matures, many wonder if such support will actually translate into truly original ideas. On this count, the city-state hasn’t yet proven itself. No startup funded by the project has netted more than $30 million, according to Bernard Leong, co-founder of SG Entrepreneurs, a blog, and Chalkboard, a digital media startup. As a result, despite a few high-profile names, the talent and investor pools are still limited.Is that simply because the initiative is still young? On the one hand, building a startup environment clearly takes time, and the fact that Singapore is known for its friendly attitude toward entrepreneurs — particularly compared to its economic rivals in the region — is evidence of its potential for success. Singapore is also full of business schools and expat professionals eager to prod its developers into action. Once another round of entrepreneurs starts reinvesting back in Singapore startups and mentoring up-and-comers then a community might flourish, says James Chan, a former coordinator of Singapore’s government’s early investment schemes who now works for Neoteny Labs. The backdrop of Asia’s growth story, too, seems likely to continue to attract opportunists to the region.On the other hand, several systemic obstacles could prevent the city-state from achieving its objective. Singapore’s indigenous market is so small (the country has just 5 million inhabitants) that entrepreneurs must go global from day one. Singapore’s is a society that is naturally risk averse, partly because of the government’s top-down governing approach, partly because of the lack of a welfare state and partly because education is geared towards managerialism rather than entrepreneurialism. That has led both local and foreign entrepreneurs to worry that a truly innovative corps will have trouble developing there. Facebook, Google (GOOG) and Yahoo! (YHOO) continue to expand in Singapore for instance, but most of their hiring is focused on sales roles, not programmers.Perhaps the most likely outcome is a niche investment role for “Silicon Island,” even if the government continues funding tech entrepreneurs on a significant scale. That said, the beneficiaries of the effort, flush with seed money, aren’t complaining. Many say their ultimate goal is to expand back to California; a few others want to catapult to Shanghai. It is unclear whether playing the role of a launch pad for foreigners is what the government had in mind with its investment scheme or a different image of the ideal Singapore startup. In any case, it will be interesting to see how it responds at the first signs of a brain drain.