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'Phoren' Fixation

Once upon a time, MNCs were considered to be superior investments to Indian companies. However, the rigidity with which their processes evolved were unsuitable to change that characterised Indian businesses

Last week, it took me just a few hours talking to potential business school students to realize that the historical 'phoren' bogey that many Indians carry around is alive and well even in the younger generation. The idea that all things foreign are good and must be superior to equivalent Indian things is perhaps too deep set to die easily. The students I was talking to were being interviewed for admission to Delhi's College of Business Studies. This is a graduate business school, so the candidates were just past their class XII exams and perhaps less tutored in their world view than MBA aspirants tend to be.

But tutored or not, their focus on the immense desirability of a career in a multinational company was just as strong as it has ever been among business students. When I asked them what their ultimate ambition in life would be, an astounding proportion said that they would, ultimately, want to become the CEO of a multinational company. Unlike a decade or two ago, the smarter youngsters may no longer consider it infra dig to listen to desi music or watch Hindi movies but they certainly don't extend this preference for things Indian to their careers.

Does this preference for multinationals extend to investments as well? Once upon a time, it certainly used to. In the 70s and 80s, and perhaps well into the 90s, multinational companies were considered to be superior investments to Indian companies. Investors routinely used to reward these companies with price earnings multiples that were higher than those of similar Indian companies. The major reason was that these companies were presumed to have higher standards of corporate governance. Which is a polite way of saying that investors thought that most Indian promoters stole shareholders' wealth and fattened their own wallets and this was something that did not happen in multinationals. This was probably true. Whatever the professional managers of multinationals stole from shareholders was chicken feed compared to what promoters of many Indian companies did. But in the long run, multinationals listed in India did not prove to be good investments. Perhaps the rigidity with which their business processes and goals evolve were not suited to the crazy pace of change that has characterised Indian business in the last decade. The ear-to-the-ground entrepreneurial spirit that Indian businessmen have displayed is simply missing in most multinationals. If you look at areas like telecom, it is clear that professional execution is all very well but underlying that there must be the drive that a malik brings to a business. And the returns that listed multinationals have brought to investors bear witness to this. Since MNCs were considered a good investment label once, there are even a handful of mutual funds that specialise in investing in such companies. These funds' long-term performance hasn't been anything to write home either, despite their fund managers liberally stretching the definition of a multinational. Of course, as the policy framework has evolved, multinationals listed on Indian exchanges have become the exception rather than the rule. Listed multinational like HLL, Colgate, Gillete are no longer the standard ownership model, Toyota and Honda are. As an investment category, MNCs listed in India are on their way to extinction. But for investors who like imported stuff, a brand new route is now open now that Indian can invest abroad.

As the cognoscenti of phoren would have told you in the old days, shopping abroad is much better than buying stuff brought in here. If you can't find IBM stock on the NSE screen, you can buy it on NYSE instead.