(FORTUNE Small Business) – On a hill in Tallinn, Estonia, with a steady rain falling, an American entrepreneur gazes out over a vast expanse of grass to a massive, Soviet-built band shell below. To anyone driving past on the slickened streets of this Baltic capital, he presents an unusual sight. A 6-foot 7-inch African American man who played professional basketball throughout Europe, Ervin Latimer is wearing an exquisitely tailored, pastel-colored suit and soft leather shoes. Nobody else in Estonia--which is due south of Finland, in the northwestern corner of the former Soviet Union--looks like this. "If you don't take it too seriously, this is a very good place to be," Latimer says.

For a man with a major capital investment in an emerging-market nation, however, such insouciance isn't likely. Right now, his stomach is lacerated from stress, and the worried look etched on his face seems permanent. Despite grossing close to $1 million annually in Estonia, he's debating giving up his catering business, scuttling plans to open a cooking school, and abandoning the Tex-Mex restaurant he has been running successfully in several locations since 1993.

Such uncertainty is not unusual for small business people from the U.S. attempting to do business abroad. Aspects of the commercial world that Americans take for granted--such as a sophisticated banking system, the existence of a Better Business Bureau that can be used to investigate local vendors before forming partnerships, and the prevalence of common accounting and legal practices--aren't always replicated elsewhere. "The problem is identifying in advance the risks and opportunities in any particular country, or a culture or subculture within a country," says Gary Wederspahn, a cross-cultural consultant who runs Intercultural Business Solutions from his Geneva, Switzerland, home. "It's difficult to predict exactly what will happen."

That's especially true in newly democratized countries such as Estonia, a tiny member of the Commonwealth of Independent States (C.I.S.), where doing business is even more precarious. The fall of Communism (in the late 1980s and early 1990s) created not only a myriad of entrepreneurial opportunities in emerging markets embracing capitalism but also a minefield's worth of potential problems. And while multinationals have the resources to cope with the unexpected, many small businesses don't.

That hasn't deterred entrepreneurial Americans like Latimer. U.S. businessmen have poured billions of dollars into investments overseas, starting everything from newspapers to manufacturing plants. Much money has flowed into emerging markets, although no agency tracks these statistics. Activity in the C.I.S. is a microcosm of the trend. Since 1991, Americans have invested more than $5 billion in the region. And of the estimated 50,000 U.S. companies doing business in the C.I.S., 75% to 80% of those can be categorized as small businesses, estimates Trevor Gunn of the U.S. Department of Commerce. Although there are no estimates from him on how much money that represents, the number is usually significant enough for each entrepreneur that the headaches are real.

Latimer is a case in point of how the daily vicissitudes of doing business in an emerging capitalist environment won't always fit a small businessman's personality. Now he faces a crossroads. "Despite all that I have here, it would take me 30 seconds to pack up and leave," he says. "I wouldn't look back. There are so many things that you learn here running a business. If I were to go back to the U.S. now, I could do business with anyone."

Born in California, Latimer grew up in North Carolina, where his father owned a tire company. He showed an entrepreneurial spirit early on, although he never worked with Dad. "I was a grass-cutter in my early teens," he says. "You know the type." After studying psychology and playing basketball at Erskine College in South Carolina, he failed in a brief tryout with the NBA's Kansas City Kings (now in Sacramento). So he left for Europe and began a basketball odyssey that lasted nearly 20 years. Along the way, Latimer earned as much as $200,000 a season and got perks such as the use of a car and a rent-free apartment, which kept expenses low.

Until 1993, Latimer had never even seen Tallinn, a former medieval trading center on the Gulf of Finland, though he had lived for nearly a decade in Helsinki, a short ferry ride away. He'd come to Finland in 1984, at the prime of his basketball career, wooed by an offer to play for the Pantterit club of Helsinki. As part of the deal, Pantterit's owner, Orva Virtanen, agreed to help Latimer set up his own catering business in town, covering all expenses for two years. It was a way for Virtanen to get Latimer tax-free compensation and for Latimer to begin the business career that he figured would sustain him after basketball.

Much of his earnings from the game were in savings when he arrived in Finland, and he put $100,000 of it into his Finnish company. He retired from basketball in 1989, married a Finnish woman, had two daughters, and began running the catering business full time. In 1993, prodded by some Tallinn businessmen who knew his reputation, he ferried from Helsinki to Tallinn to cater a concert called Rock Summer. Instantly, he saw how much opportunity existed for catering and a restaurant aimed at the growing expatriate community.

With little or no preliminary research, Latimer dove in. In retrospect, he knows, that was a mistake. The wiser choice would have been to start slowly, because he was unfamiliar with the market. (As consultant Wederspahn advises, "Always have a bailout plan. Things you don't know can hurt you.")

If he were to set up shop in, say, his hometown of Charlotte, N.C., it's likely that Latimer, 47, would never have to face the difficulties he has seen--and largely overcome--during his nearly seven years in Estonia. At the moment, members of the Russian mafia are threatening to seize Latimer's restaurant, which sits temporarily shuttered beside the modern Olumpia Hotel. But his frustration runs deeper.

When he came to Tallinn, Latimer had the optimism of a true entrepreneur. He saw an opportunity to open a restaurant in a city where privately owned restaurants--or privately owned anything else--hadn't been permitted since World War II. He knew that Estonia had a nearly tariff-free economy with a freely convertible currency and limited government interference. Foreigners can own 100% stakes in companies in all but the most rarified sectors, such as banking and mining, which isn't true in most former Soviet bloc nations. That's why Coca-Cola and giant insurer American International Group had outposts there.

Only a few months after the Rock Summer concert, Latimer opened his self-financed, 30-seat restaurant. It was instantly popular with the 120 Americans who were in Tallinn building the U.S. embassy, for whom it served as a glorified company mess hall. In 1995, he invested $500,000 of profits from the restaurant and several concerts and expanded to the second floor of the same building. Improving ventilation alone cost him $100,000, but the investment paid off.

Drawn by the lure of an authentic American experience, Estonians and Russians started coming in droves as word spread about the high quality of the food, which included Tex-Mex cuisine, ballpark corn dogs, and pizza. Despite 150 seats, the line at Ervin's sometimes snaked out the door. He was a familiar sight at the restaurant (where he made a point of visiting every table) and on the streets of Tallinn. At a time when everyone in the Baltics was trying to associate themselves with Americans, here was the most American-looking American of all.

"The first Thanksgiving event we ever did was at Ervin's," says Steve Gardetto, executive director of the American Chamber of Commerce in Estonia. "It was a huge event. Business seemed to be going great."

Behind the scenes, however, Latimer was finding business in a developing democracy quite different than in Finland, a European Union member and long-standing democracy, where ground rules were well established. Like many eager entrepreneurs expanding into new territory overseas, Latimer underestimated the cultural differences involved. From the beginning, he was forced to train his entire work force continually to equate service with revenue, a concept that had disappeared during half a century of Soviet rule. Cursory investigation would have alerted him about this. "They had a saying in the Soviet Union: 'You pretend to pay me, I pretend to work,' " says consultant Wederspahn. "Also, 'No matter how little you pay me, I can always work less.' And those are hard habits to break."

In addition, Latimer had to defend his restaurant regularly against employee theft in a culture where stealing from your bosses--the Russians, whom the Estonians never stopped perceiving as an occupying army--served as a noble pursuit. Petty theft not only ate into profits, but it also undermined the feeling of partnership Latimer was trying to establish with his employees.

"Unfortunately, that mindset is still very much in existence here," says Greg Grace, sales manager of Coca-Cola Estonian Beverages and a veteran of the local business scene. "Especially in restaurants, people here tend to steal. Salaries are still relatively low, so they've thought of different ways to cheat the system."

Latimer's biggest mistake was in not aligning himself with an Estonian business partner. He figured that because he knew Finnish (close enough to Estonian so he could understand it) and had enough capital, he didn't need local help trying to garner bank financing--which at rates of more than 20% was difficult to come by. But as a cultural outsider, he misunderstood the business dynamic.

One of the most important roles of local partners is to be a cultural informant for you," says Wederspahn. "So much of business success depends on negotiating, selling, dealing with the local authorities, and that's where a local partner can help. But it has to be a bicultural local partner who understands what your desires are as well." While resources exist for finding vendors and suppliers in most nations--the matchmaker program at the U.S. Department of Commerce is a good place to start, and American chambers of commerce in various countries can also be helpful--the process is a high-stakes gamble (see the box on page 66). "And a bad local partner is as bad or worse than no partner at all," says Wederspahn.

In Latimer's case, he had no one to tell him that Estonians--who still perceive their democratic society as fragile--crave instant monetary gratification, not a long-term investment in an uncertain future. Despite offers of equity interest, over the years he lost several chefs in succession to Mercedes-driving Estonian businessmen who put cash on the bar as a way to start negotiations. As a result, by late 1997 Ervin's Tex-Mex had settled into inconsistency. It was only as good as whomever Latimer had found for the kitchen that month.

Unfortunately, visa quotas made it difficult to bring in foreign help. Until recently, in an attempt to keep out Russians looking for a higher standard of living, Estonian working visas to countries outside the European Union were limited to about 500 at any one time. Latimer had been importing the occasional chef from U.S. cooking schools, but he couldn't guarantee them a steady job.

After a bomb exploded in the fall of 1997 outside the building housing Ervin's restaurant (seriously wounding a suspected organized crime boss), the number of foreign patrons diminished. Paired with the difficulty of finding--and keeping--enough employees to staff a 150-seat restaurant, that led him to scale back and reopen the restaurant in a smaller location outside the city center. "I decided to change the profile of the business," he says, "and concentrate on producing mostly Tex-Mex products and microwavable dishes for wholesale and retail sale, and catering to schools and hospitals."

Early last year, Latimer engineered a coup and won the catering contract for Air Estonia, the state-run carrier, which was earning him about $100,000 a month. As much as he liked to complain about life in Estonia, he seemed to be set in the Baltics for the long term.

Of all the money Latimer has made in Estonia, however, he hasn't taken a single dollar--or Estonian kroon, which is rather comically abbreviated as EEK (one euro = 15 EEKs)--out of Tallinn. Looking back, he figures, that was a major error. "I should have taken money out, but I've always reinvested," he says. "I would have more than a million U.S. dollars saved, and I'd be on easy street. But I kept thinking about the potential of this country."

Then the mafia came knocking.

Organized crime doesn't rank as one of Estonia's biggest problems. Trademark infringement, in which the names of fast-food chains can be pirated from a legitimate business a block away, is rampant. Bootleg compact disks and brand-name consumer clothing floods the market. But few foreign investors admit to having run into problems with the local branch of the Russian mafia or any other illegal group. According to a recent study by the European Bank for Reconstruction and Development, however, close to 40% of small businesses operating in the former Soviet Union pay bribes in order to do business.

Latimer is, so far, determined not to become part of that statistic. But because he has already sunk $1 million into capital investment, he is an easy target for a takeover. His first hint of trouble came last fall when, he presumes, criminal operatives bribed one of his workers to sabotage a government inspection of his catering operation, leaving his cold storage facility with a temperature of as much as 70[degrees]F. Within days, his Air Estonia contracts were canceled.

Soon after, he was approached by a group of suspected mafia members that demanded he sell his restaurant for far below market value. If he didn't sell, he says, they told him incidents like the sabotaged inspection would reoccur. Latimer hurriedly closed down the restaurant, transferred the office lunches and holiday parties he'd booked to where the cooking school was supposed to have gone, and considered his options.

He's still considering. Estonia has been a lucrative adventure, even if he sells out at mafia prices. Despite being victimized by sabotage, having to deal with an unfamiliar language, and continuing to sell this Northern European nation on Tex-Mex cuisine, Latimer has had a profitable stay in Estonia. In his best year, he had sales of $450,000 and profits of more than $100,000 from Ervin's Tex-Mex Restaurant alone, with more coming from catering and special events. (His biggest moneymaker: catering Michael Jackson's appearance at the Song Festival Amphitheater in August 1997 to a crowd of 70,000. Latimer made a killing. He grossed $300,000, about 25% of which was profit.)

So what's next? He can return to Finland, where his family lives and his catering business still thrives. He can move back to the U.S., where he hasn't lived since 1974, try to peddle a design he has for a 21st-century running shoe, and market new types of sports training equipment, a longtime interest.

As he wandered the grounds of the Soviet band shell, Latimer's future in Estonia remained uncertain. "I'm thinking of looking into Latvia," he says. "I had some contacts there a few months ago, and it seems like a more stable situation. My problem is, I love a challenge and a new opportunity. The grass is always greener to me somewhere else down the road."