Mainly Muslim Malaysia has been a magnet for Middle Eastern investors flush with petrodollars who have been snapping up banks, hotels and malls.
Abu Dhabi investment arm Mubadala Development Co is leading a consortium to develop a multi-billion dollar city within Iskandar. Kuala Lumpur has also established itself as a leading centre in Asia for the burgeoning Islamic Finance market.
But state-linked Singapore developers have been cool to Iskandar. Many analysts say for it to really take off, it needs Singapore firms such as CapitaLand to develop on land that costs as little as 1/30th of Singapore land.
"Singapore investments could be very crucial for Iskandar," said Malaysian political analyst Khoo Kay Peng. "Malaysia needs investments in high-technology areas such as biotech, rather than just a pure real estate play," he said.
Singapore developers are wary after they got burned by frequent and unexpected policy changes during Mahathir's reign, said the head of investments at one Singapore firm.
The two countries have a long history of strained relations dating back to 1963 when they gained independence from the British as a federation only to split up two years later.
At the time Singapore feared it could not survive on its own with no natural resources and squeezed into an area half the size of Greater London. But since then the island has established itself as a major Asian business and finance centre competing with Hong Kong.
However, it lacks a readily available pool of land and labor that booming southern China offers to Hong Kong, and south Malaysia's development plans aim to fill that void.
Yet rather than counting on its neighbors, Singapore has tried to overcome the lack of space by reclaiming land from the sea and shifting factories to the neighboring Indonesian island of Batam.
Local firms in their quest for profits and growth are also looking further afield to booming economies of China, Vietnam and India. For example, a group of Singapore government-backed firms led by Keppel is building an "eco-city" in China, while state firm Ascendas manages business parks in five Indian cities.
And despite Malaysian lobbying, Singapore's official response to the project did not go beyond forming a joint committee with its neighbor.
The plan also has its critics in Malaysia.
Mahatir, who still pulls considerable weight in local politics, recently described the blueprint as "a platform for Singapore to expand its sovereignty." "In the end the area ... will be filled with Singaporeans and populated only with 15 percent of Malays," he said.