I am not an expert; just giving you a brief points which comes to my mind.
1. It's cost-effective: You do not have to spend on job advertisements or consultants or any other expenditure involved in recruitments.
2. It saves a lot of time.
3. Filling positions within the organization boosts up morale of an employee as they see career growth and new opportunities with the company.
1. Maybe the person referred does not possess the skills which a person from outside might have. But this too is just a probability; so cannot be regarded as a big disadvantage.
But many of the organizations follow this 'referral policy' and reward employees if the person referred is selected.
14th September 2011 From India, Gurgaon