Singapore has been an economic success story. Its economic model of actively courting foreign investment and "picking winners" is revered and studied at great length by others aspiring to double or triple their income levels within a generation. However, Singapore faces a bigger challenge this time around. It has gone through the stages where it can raise output by getting more people to work in the factories (by increasing population or workforce growth rates) or by investing more capital to buy more machinery and equipment. But pouring in more capital or scouting for more foreign investments can only do so much, because of diminishing returns. The challenge now is how best to utilize the capital the country has. This is where creativity and innovation come into action.

It is unclear whether Singapore Inc has grasped this mindset. Yes, Singapore was among the first in the region to tout the idea of a knowledge-based economy (KBE). The rhetoric resonates everywhere from schools and community centers to conversations at coffee shops. But government policies seem to be telling a different story. Government agencies still fervently track how much foreign investment they attract every year instead of how many patents Singapore companies have been awarded or the number of research engineers available.

Billions of dollars have been poured into building a "world-class semiconductor cluster" in Singapore. The small island already hosts 11 wafer fabrication plants, and more are to come in the next one to two years. A wafer fab typically costs at least US$1 billion-$2 billion to build. In a rare critique of government policies, a correspondent at Singapore's Business Times quite aptly puts it: "Fabs cost money, of which Singapore has plenty. But it also needs three other factors which are in scarce supply: land, water and manpower." Huge tracts of land have been reserved for industrial use and leased to private companies at subsidized rates. Singapore buys its water from its neighbors Malaysia and Indonesia.

Those who work in a wafer fab are more skilled than those in disk-drive factories (of which Singapore used to host plenty before the manufacturers migrated to Malaysia and China to lower costs), and thus one might argue that Singapore has progressed up the competitiveness ladder by moving from disk drive to wafer fab.

However, a closer examination of the semiconductor industry is warranted. The industry is divided into two parts: design of chips - which requires lots of human talent but little capital - and making or fabrication of chips - which needs lots of capital but less human ingenuity. One can compare it to Georgio Armani's designers who draw up creative designs in Milan or New York and send the blueprints to China or Mexico for manufacturing. It is no wonder that foundries have been called the high-tech sweatshops of the '90s.

While foundries worldwide are severely battered by faltering chip prices, chip designers in Taiwan - about 140 of them - managed to grow their sales by 10.5 percent in the third quarter, according to the Taiwan Semiconductor Industry Association. Because their products are not commodities, designers do not compete on costs but on differentiated design ideas. Thus they are able to weather the down cycles better than manufacturers do.

However, while fabs keep springing up on the small island of Singapore, there is no visible sign of chip designers. If it is so obvious, why doesn't Singapore Inc get it? Maybe it is not so obvious. Creative talents, unlike physical capital, are not something that can be augmented easily or simply attracted from overseas.

Biomedical science is the next big thing in Singapore. Already billions of dollars have been put aside to provide carrots for foreign pharmaceutical and biotech companies to set up in Singapore, to fund research-and-development (R&D) activities, and to raise public interest. However, much as with the semiconductor industry, most of the foreign capital that has been attracted is in the manufacture of drugs. Singapore is playing host to a wide range of world-class pharmaceutical companies such as Schering-Plough, GlaxoSmithKline, Merck, Sharp & Dohme, Aventis and Pfizer. Like any other manufacturing business, it will be driven by costs eventually when the industry matures. On the other hand, there are few biomedical companies conducting basic R&D in Singapore.

Free statement of ideas begets creativity. Remaking Singapore will involve changing the mindset that the tonic soup to boost creativity is best served bottom-up.

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