This may seem like a nothing subject to write about but it does effect everybody who owns or operates a website across the world. As Rich at @army_surplus asked is it better to have a .uk domain on a UK server if you are targeting a UK audience, or could it be hosted in the USA or India?
The simple answer is that there is no simple answer.
First, lets consider @MattCutts answer in 2009 - "we look at the server ip address"
Ok so with that in mind you may see the answer is both yes and no. Google looks at the server location but that isn't the end of the story, and you can in theory override what "google thinks" to some extent using Google Webmaster Tools.
Lets now return to Rich's question about targeting a UK audience.
In my experience server location and domain targeting to a country can deeply help your SEO. For example I once ran a domain andykinsey.com (now defunct), I played around and moved it to andykinsey.co.uk - after a short while visitor numbers picked up as did the number of enquires. On the other hand we have SEOAndy which for about 3 months was a .co.uk website but it was only when it moved to .com it took off. Both are targeting different audiences. andykinsey.co.uk targets the uk and seoandy is a generic "this is for everyone" website.
Thinking about my experience with server locations I've twice had servers outside of the UK, once in France and the other in America. On both occasions the traffic I had stagnated, as did my rankings within the UK (my main audience for both websites). So to me location matters when targeting a country.
Don't Go Cheap!
Rich added a comment to our discussion on twitter, mentioning that most people would prefer cheap over location. Whilst this is true I would hope that those webmasters and business owners who've now read this article would ask themselves "where am I hosted" and if it's not in the country you target then it's really time to move - even if it is more expensive. Cheap doesn't pay when it comes to the basics of SEO.
Where do you host your websites, let us know!