The Board of Investment has issued a written defence of its promotional policies, which are being blamed for contributing to a wave of foreign-dominated retail ventures that are swamping small local businesses.

"The main point we should discuss is whether the BoI promotional policy has led to the extinction of Thai-run groceries," the agency says in its report.

It goes on to note that promotion of foreign investment in retailing was a one-year emergency measure intended to help struggling Thai operators attract badly needed capital. As it turned out, there were very few applicants.

In fact, the BoI said, modern-style retail businesses such as supermarkets were making inroads years before the BoI officially began promoting the business in December, 1998.

The Central Group, Robinson and The Mall, all Thai-owned enterprises, began building department stores two decades ago and had enjoyed considerable success. At the same time, Japanese companies such as Daimaru, Sogo and Tokyu have struggled in Thailand.

The second invasion was also led by Thai-owned concerns, licensed by multinationals such as 7-Eleven and Makro. The third wave included superstores, again owned by Thais: Big C owned by the CRC Group, a Central-Robinson venture, and the Charoen Pokphand Group's Lotus Supercentre.

The Central Group also co-ventured with Carrefour, the world's second-largest retailer, in hypermarkets. It also tied up with Royal Ahold of the Netherlands, the world's sixth-largest retailer, to establish Tops Supermarket.

While the large new players were Thai-owned at the outset, the 1997 economic crisis created severe cashflow problems for many Thai retail groups that had expanded so aggressively. The CP Group sold most of its shares in Lotus to Tesco of Britain in 1998. CRC sold part of its stake in Carrefour of Thailand to Carrefour of France in 1998, and disposed of its holding in Big C to Casino of France in 1999.

"We can conclude that the entry and expansion of foreign retailers arose from their purchases of Thai-owned retail ventures rather than from setting up their own wholly owned businesses," the BoI said.

The BoI has been known mainly for focusing its attention on investments in manufacturing. It came to see the promotion of retailing as essential because of the problems Thai operators were experiencing post-1997.

The failure of large retailers, officials argued, could have a severe knock-on effect on other businesses including suppliers, thus worsening the problems of bad loans and unemployment.

The BoI decided in December 1998 to make retail businesses and consumer product merchandising eligible for promotion, with tax incentives for foreign companies to enter the sector, hold land and bring in expatriate staff.

Officials said they realised that small Thai retailers could be affected, especially those operating in the provinces. To cushion the blow, the BoI set conditions that the retail business would be permitted only in zone one, covering the six highly developed provinces of Bangkok, Nonthaburi, Nakhon Pathom, Samut Prakan, Samut Sakhon and Pathum Thani.

Foreign companies wanting to set up retail ventures in the six provinces were required to acquire existing ones before January 1999, with no new construction allowed.

As well, the report said, the BoI treated the promotion as an interim measure to solve liquidity problems. Applications for privileges were accepted only until December 1999, and the entire capital investment in each project had to be brought in from abroad to help foreign exchange flow in.

As it turned out, approvals were lower than expected. The BoI promoted two ventures during the period: one by Carrefour and the other by Seiyu of Japan. Their combined share of the retail market was only 5%, with 4.7% belonging to Carrefour.

Given the small share involved, the BoI said it was unfair to claim that it had been responsible for the current threat to small Thai-owned retailers.

Others that did not receive BoI privileges have considerably larger market shares: Makro (16%), Lotus (10.7%), 7-Eleven (11.5%), Big C (11.3%), Central and Robinson (16%) and Tops (5.8%).

The BoI privileges were also available to Thai investors but there were no applicants. Officials suggested that the incentives, such as facilitation of land ownership, were not required by Thais.