We know that Google uses the location of a site for example .co.uk or .com.au in its ranking algorithms. If a searcher in the UK looks for a product or service, he is most likely to see the sites from the UK in search results. But, in case of top level domains, Google uses location of server and other signals in finding out what country a site is relevant for.
Google Webmaster Tools provide the flexibility to site owners to specify the target country for generic top level domains. But, there's a clause to it. They cannot specify a different target if the top level domain registration is restricted to a specific country.
Now when countries like Columbia with their country code top level domains of .co have opened up registration, site owners with these domains have been facing problems. Their websites with .co end up getting ranking in Columbia even if they don't want to target the users in that country.
Google's Pierre Far in his Google+ account has revealed that Google has been updating its indexing systems to treat the country cods TLDs of certain countries as generic TLDs. This implies that even though the top-level domain has a country code, Google will not consider is specifically for the country.
So, Google has expanded the list of Country Code Top Level Domains, which it considers as generic. If you have a domain name with .co or .io, you have the flexibility to specify the country you want to associate the domain with.
For those whose website is not country-specific, it is better not to specify a target country. Google's index no longer associates ccTLDs with the specific countries, so they won't be considered as more relevant for the searchers of the specific countries.