My university (in France) is having a debate about the relevance of taking rules for preventing too many of its PhDs to be recruited here, or asking them to have some postdoc outside the region before. The same rules are also debated about the promotion to full professor (from what is called maître de conférence and is a tenured associate professorship).
Many people have strong opinion on these issues (me included), and I would like to gather a comprehensive list of arguments (in both directions) on this matter, if only to clear my ideas.
Some arguments may apply only under particular circumstances or in specific fields, please say so when it applies.
Answer
In addition to the other answers, there is a perverse effect to local hiring: a professor can promise to her PhD students/postdocs a permanent position later on, which in turn tends to "tie" the student/postdoc to her professor, perhaps preventing her to develop her own research agenda, and doing more administrative/teaching/supervision tasks than normally required (to basically look good in the eyes of the advisor). This then builds a stack of postdocs, waiting for the next permanent position, which would be awarded not to the best candidate, but to the one who has waited long enough.
Of course, I'm on purpose exaggerating the description, and this is no way can be generalised: many, if not most professors will actually recruit the best possible candidate, local or not. But I have observed this behaviour several times, in different countries, and although forbidding local recruitment wouldn't solve every problem, it would perhaps solve that one.
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