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Political instability is a feature of the general environment and can manifest itself in a variety of ways in business transactions. It differs from political risk, which refers to the possibility that political decisions or events in a country will affect the business climate in such a way that investors will lose money or not make as much money as originally expected. However, an unstable political environment can create, or hint at, possible political risk. This can affect the foreign business world in many different ways. There may be a decline of the stock market and a decline in foreign investment due to fear of political risk. An increase in crime and corruption can upset businesses operating within a foreign country, such as was the case in Moscow. According to studies performed at the beginning of the Yeltsin presidency in 1994, "all retail stores, restaurants, cafes, kiosks, clothing markets, and auto importers, along with seventy to eighty percent of privatized enterprises and commercial banks, were making protection payments to criminal gangs." (Bernstein, et al., 1995) Legal factors affected by political instability in turn affect doing business in foreign countries. Political instability can create different levels of taxation and change zoning laws. How a business is required to be registered may change and the actual operation laws and tax laws themselves may also change. The amount of government support a foreign business receives and the way a foreign business is allowed to advertise can be affected. Also, the privatization of local companies and services may create more competition and ultimately push foreign businesses out of a market. These are all some of the ways that political instability can affect doing business in foreign countries.
3. What are some differences between business and financial risks?
Business and financial risks sometimes overlap, but the two terms define different sets of risks. Financial risk is the possibility that a bond issuee will default, by failing to repay principal in a timely manner. So financial risks deal with the actual risk of a business not being able to recover money lent. Business risk is the risk associated with the unique circumstances of a particular company, as they might affect the price of that company's securities. Unlike financial risks, business risks are not always risks directly associated with a company's monetary assets, even though they can ultimately affect the financial bottom line of a company. Also, business risks will vary depending on the type of business, while financial risks are similar throughout business. Examples of financial risks may be loans or company issued credit lines. An example of a business risk may be a clothing retailer deciding to display a clothing line by an unknown designer.