Well, I think local talent can get people more interested if they've got good chemistry, can make people laugh and give you the information you need. BUT it is getting difficult to compete with iPods/iPhones, satellite, Pandora, etc., only because those give people the means to get exactly the music they want to hear.
Music programming IMO has gone down hill at many stations just because stations are afraid to take risks and we hear the same music -- no matter the format -- over and over again. A fad may make it's way for a few months then it's back to more of the same.
When people find artists they like, things like Pandora and the more specificity of satellite stations can help them find other new artists they like that aren't always played on radio because stations don't want to take a chance on them.
Personally, the station I listen to in Greenville -- X98.5 -- really has little local connection. They have sponsored lots of events and done a great job with their Facebook page in keeping in touch with the community. But with the exception of morning news/traffic/weather (which are great additions, I may add), it's all music. No personalities.
But really what's the difference anymore? So many stations use voice tracking and syndicated shows that there's probably few stations where more than 50% of its programming is truly "local" except in larger markets, but even they often use syndication.
X98.5 is likely going away (hoping not too soon since it's already been two months since a "flip" was rumored). What will I do then? I honestly don't know. There isn't a single station otherwise that plays the music I like. Honestly, even X98.5 has songs that make me flip to another station.
In a city like Greenville, however, most people have short commutes to work. It only takes me 10 minutes. So I'm not going to bother to hook up my iPhone and play music from it just for that length of time. The only time I'm in the car longer is taking the kids to school and they like to listen to the radio and laugh at whatever Hawk & Tom are saying (yes, that's sad, but at least it is a local show).
I think small to mid-sized cities are a bit safer from the non-radio sources. It's bigger cities where people are sitting in traffic for an hour or two that may be more open to the threat of iPhones, etc.
If Internet radio ever becomes commonplace and cheap in cars, it'll be a whole new ball game.