As companies move into emerging countries, they need to pay as much attention to the legal structure and political environment as they do to areas such as marketing and finance. Otherwise, they may find their venture -- and their profits -- blindsided by a shift in the regulatory or political winds.

That's one of the lessons to be learned from research done by HBS associate professor Debora Spar in the development of a new elective called Managing International Trade and Investment. "Managers must understand the environment that confronts them," she writes in a document she prepared for the course, "including the rules that govern their target market, the norms that underline these rules, the power brokers who make the rules, and the likely source and vigor of enforcement."

	I see parallels between the Internet and emerging countries like China.

According to Spar, one way that multinational corporations can reduce the political risk of doing business overseas is to take an active role not only in shaping product markets but participating in the formulation of the local "rules of the game." "The conventional wisdom is that states make the rules and that corporations simply obey," she says, "but more and more companies are employing a range of means to shape the rules that confront them."

Spar is most interested in the interaction between firms and states, particularly in how that interaction takes place in a global economy in which executives come face to face -- and not always on friendly terms -- with regulatory agencies, international trade bodies such as GATT and NAFTA, and local governments. To help companies work through conflicts -- and perhaps avoid them altogether -- she has created a framework that helps executives better understand local market conditions.

Spar examines how the rules created by social custom -- commonly known as norms -- can have a subtle but powerful impact on a company's ability to succeed overseas. She cites, for example, the Chinese practice of guanxi, a complex system of relationships that the Chinese regard as an acceptable way of conducting business. "If one reneges on a personal contact or neglects an established relationship," Spar explains, "he or she will be punished -- not by the state but by members of the relevant community. Subsequent deals will not materialize, favors once granted may be withdrawn. Foreigners who stumble unaware into the system may also receive a similar fate." Norms such as guanxi are simply part of the reality of the international marketplace, she says, existing side by side with the formal rules -- or laws -- created by the government.

Spar also focuses on the rules created by corporations themselves -- the industry standards that she regards as one of the most effective sources of power for companies operating in a foreign country. Through technical prowess, industry coalitions, or sheer market dominance, she points out, firms can make their standards a necessity for others -- from the width of railroad ties to technical protocols for computer networking. "John D. Rockefeller played the standard-setting game in the early days of the American railroad," Spar says, "while Microsoft and Intel play it brilliantly today."

In conjunction with her course development research, Spar has also written cases in a variety of industry settings. One of the most dramatic describes a situation in which the CEO of Chiquita Brands International struggles with the European Union's 1993 decision to restrict banana imports, a ruling that effectively shut down the company's largest market and resulted in a 66 percent drop in its net worth three years later. The Chiquita case unfolds as a struggle among industrialized nations, where long-standing laws and standards have created an environment of relative stability. Spar's research into emerging markets, however, uncovers a scene where managers must deal with uncertainty as a matter of course. In a case about the Russian oil industry, for instance, three giant multinationals have to determine how they can structure their investment to protect themselves in a legal and political environment that is in a constant state of flux.

What are the appropriate response strategies in such circumstances, Spar asks. At a minimum, she has learned, they involve discovering new means of leverage and then exerting that leverage over the appropriate Russian power brokers. Where laws are feeble or constantly shifting, firms need to find alternative ways of enforcing the rules upon which their business depends. Fox Television, for example, now encrypts satellite transmissions where governments won't enforce intellectual property rights.

Spar notes that the fast-changing rules of emerging markets bear a striking resemblance to the dynamism of the information economy. "I see parallels between the Internet and emerging countries like China," she says. "They have both generated considerable excitement, but many of the firms rushing into them don't know precisely what they're doing. A question that quickly confronts managers is, Who is going to make the rules? One answer is that it's often the company that makes the first move."

Spar's work portrays an intense level of competition around the globe. Successful companies will master the rules that govern trade and investment in their target markets and develop a strategy to influence their development in the future. "Playing this game demands not only the skills of the marketplace but also a deep-seated recognition of the politics inherent in it," she concludes. "To make the rules, firms must first understand what they are and how they work."

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