One of the many criteria that Google (and Yahoo and MSN) use to rank pages is by the number of other sites that link to you. Other criteria include keyword matching and freshness of content. If two sites have the same keywords and same "freshness" (updated today), but one has been linked to by 50 other sites and another has been links to by 1 other site, google will rank the person with 50 links higher.
At least this is how it works today. Once google tweaks their algorithm to give "better" results, all bets are off. Since Google has hired many of the best software engineers in the country, they've been able to further compare links that point to your site. If you are a travel site for instance and 50 other travel related sites point to you (B&Bs, car rental, local restaurants) and you were compared to another travel site with 50 non-travel related sites pointing at your (an insurance company, a website design company, a house building company, a graphic artist) - then Google says, hey wait a minute, I'm not going to give you as good of a rank because the people you link to (and that link to you) are not related to your business at all.
This idea of referring to each other was started out of friendship (hey buddy, let's exchange links) and then turned to page rank madness (if you link to me, I'll link to you, even though there's no business relationship, but Google will like us more because we have links!). One of my customers (Norabloom Botanicals), links to other businesses that relate to theirs (for the most part:
http://www.norabloom.com/links.php).
All of this came up because for the third time in the last week one of my customers asked me if they should exchange links with someone that emailed them. The someone was "Ion Doaga" of
http://www.cornellhotels.com/ and
http://hotel-systems.com/ which is an affiliate travel site with what appears to be the parent company of Booking Horizon (of Av. Marquès de l'Argentera, 25 entl. 2a; 08003 Barcelona; Spain) online at
http://bookinghorizon.com/.
Does it make sense to share a link to them? They want you to add their link to your site, so they get more traffic. They list you on their site, in a page that is buried and has little chance of ever directing traffic to you. They don't list any names or office or local place to their business - - which makes it seem like they either are not proud of living and helping this community, or that they are not from this community. It looks like all of the local content for "Cornell Hotels" was gathered from thousands of miles away. As you look around the site, just remove the words "Cornell Hotels" and the Cornell Hotels logo and you could be anywhere doing this "local" service for any place in the world.
There has to be better ways to exchange links with local companies that have real traffic and may actually deliver people to you.