Local hosting forms part of the geo-targeting story - but it also contributes to other factors related to search engine optimisation. Search engines carry out a reverse IP look up IP addresses associated with sites and pages they have crawled. This gives them:
Let's look at this from the search engines point of view. If you're trying to provide the most relevant results to a searcher in Austria, searching in German, you're going to give web sites also with an Austrian address a slight boost because that's more likely to generate higher click through rates from search engine results page - a metric which gives you confirmation about relevancy.
If, as the search engine, you're looking at pages for an American searcher and you have two sites where everything else is equal - but one has more links coming from other countries - which are you most likely to favour? The site with international links is likely to be chosen purely because a number of international links would suggest the site has a better reputation than the competing site where all other factors are equal. Additionally, the internal links of a family of sites will be given more credence if the locally targeted pages are also hosted close to the target users.
So the point about local hosting is?
In addition to providing local users with pages a little faster, local hosting ensures that: