Netlash offers some insight into the challenges faced by search engines, including Google, when it comes to providing country-specific search results. The graphic below demonstrates a substantial drop-off in traffic to a Dutch web site when it was moved to a server in a different country:

Google's dirty little secret - Netlash

Due to circumstances, the server was moved from Amsterdam (The Netherlands) to Brussels (Belgium). All other parameters were unchanged.

Result of the move: all Dutch traffic disappeared, while the small Belgian traffic remained.

Based on what I've read about Google's geo-location parameters in the past, this shouldn't happen. The site's TLD remained .nl, so the location of the server shouldn't override that issue. In fact, it's quite common for webmaster to host their sites in countries other than their own. Many web site owners may not even realize that the server space they're paying for is overseas or across the border.

If the problem experienced by Netlash is not unique to their move, perhaps Google should add a country designation to their Sitemaps interface so webmasters can proactively communicate their home country to Google. That would benefit webmasters who are attempting to be properly indexed, searchers looking for relevant country specific results, and Google user retention by providing a better experience for searchers.