Local hosting should help you in local search because Google and other search engines do look at the IP number of your web site. But this isn't always the case though.
Ken, while your question isn't a dumb one, I think doing any sort of geo-targetting to the state or city level would be an extremly difficult and dumb thing to do. The internet isn't configured for that sort of granularity.
Matt Cutts mentioned that it does give it a boost at the Local Search panel at PubCon...a few of us hassled him about it after the presentation and he admitted that they do not really look at it that deep.
So currently I do not think it matters at all.
Bakedjake; Are you talking about the infrastructure of the internet? Because a significant portion of searches seem to want to search for stuff by location.
Merging those two factors is the trick I guess.
Werty; That's interesting about Matts comments at Pubcon. Thanks for the insight. Things change though, I wonder if they'll take a harder look at this hosting locations in the future.
If so, it'd be good to be prepared, if that can be done without betting the farm up front.
>> The internet isn't configured for that sort of granularity.
Au contrare mon capitaine! Even with current infrastructure, that level of granularity could be (and probably is to certain US gov agencies) provided on both the visitor and the host in real time. The difficulty lies in security, privacy, and cost issues.
Maybe I'm misunderstanding, but doesn't Adwords do this level of granular geo-targeting?
I'm not sure Adwords can deliver 100% accuracy. With large ISP hubs like AOL out there it used to be impossible to get reliable geographic information. All lines within a certain area were routed through a regional hub which gave the illusion that all of the traffic originated at the hubs geographic location. I don't know if it's still the case though. Maybe I just didn't ask the right people...
Google places a few of my sites in my web host's local town in local search and I have never said anything about the city on my web site. I don't know of any other way Google could get that info besides the IP address.
A good website is to be hosted in a good data center. A good data center has a fast connection to the top tier of the Internet, is in a robust location (immune to weather, natural disasters, acts of war, etc), and is secure.
It is absurd to suggest that local businesses host locally. Completely absurd.