International diversification happens between one country to another. It is a very complicated term to understand. I think that the easiest way to understand how it works is by think of each country as an asset. Different countries have different economic conditions, such as industrial production, inflation rate, government and monetary interventions, etc. Therefore, I believe that company in different country will not have correlated performances. Each country is not perfectly correlated. We would obtain diversification if we want to put those countries together. Therefore, if I were an investor in America, I would say that the international diversification can lower portfolio risk by reducing the undiversifiable component of a portfolio that includes only the stocks in the U.S. Diversification is normally being used as a marketing strategy for a corporation. It can happen at both business unit and the corporate level. Diversification pursues to increase the profitability by way of greater sales volume acquired from those new markets and new products. The benefits of investing abroad are largest for investors in developing countries. It is also includes when controlling for currency effects. Benefits could gain from different sources, but most of it is from investing outside the region of the home country. This international diversification benefits persist large when controlling for short sales confinements in developing stock markets. Countries with higher country risk could gain the most international portfolio diversification. In addition, many companies now are diversified internationally. Accordingly, Coca Cola, though a U.S. Company, will reflect the ups and downs of conditions overseas. This kind of dependence might create a thing called “contagion effect,” Lewis says. "You have multi-nationals in all these markets. It's not the case that we are islands in ourselves. We really are more integrated."     http://www.morevaluem.com/glossary/restrict/International%20Diversification.html http://knowledge.wharton.upenn.edu/article.cfm?articleid=1891