ABSTRACT
This paper re-examines the extent to which gains to international diversification are due to differences in industrial structure across countries. Recent papers by Roll (1992) and Heston and Rouwenhorst (1994) investigate this issue and find conflicting evidence. Using a new database, the Dow Jones World-Stock Index, with coverage in 25 countries and over 66 industry classifications, we find that while country effects dominate industry effects, the variance of industry effects comprises a substantial proportion of the total variation in international index returns. Global investors that ignore the industrial mix of the portfolios in which they invest can limit their potential diversification benefits in an economically important way.

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