You say that, but there are cases even in small countries where this didn't happen. Like trademe in New Zealand which was just like ebay. Ebay still hasn't become the major place to do auctions in new zealand.
Basically no one is competing in NZ because no one cares about the NZ market. It's simply not large enough. Until it is.
I do think there is a lot to be said about not trying to build these giant world-eating companies that require you selling your soul to the devil. Companies like Craigslist I have a ton of respect for. A lifestyle company should be the dream of most, not the crazy disconnected-from-reality VC world we're seeing today.
I simply think anyone betting on their market being small enough to fly under the radar is making a very tenuous bargain.
Living in Poland, I see so many good ideas and good teams, that go absolutely nowhere because they begin with the local market, and struggle to achieve ramen profitability, while their global counterparts achieve scale and funding to ultimately take over the market.
There is a small niche of successful copycats that grabbed the local niche, and maintained the lead over the years due to strong network effects - like a local reddit clone (wykop.pl), or a local ebay clone (allegro.pl), but that's almost it.
All the other projects either failed to get off the ground, or got killed when globally oriented startups entered our country.
Ebay like marketplaces still have a big physical world component present. Even if it isn't ebay, it might be some other company in Australia. Or maybe trademe becomes the company which tries to take over in Austrlia. It's inevitable and just a matter of time!
Xero, however, has massive potential for growth, because it's international.
I don't understand why that is necessarily a bad thing. If someone is looking to make a shit ton of money, have a chance to monopolize or dominate the international market, then yes, that makes sense. But if you're happy and content serving nationally, and so are your customers, I really don't see why someone would want to expand internationally.
2) The internet may scale worldwide, by that doesn't mean any service can do so while maintaining that value per user. Hell, it may not scale beyond a neighborhood, let alone a country.