Yes but what would be a reasonable basis? From experience I cannot think of any.
I am a CO for Department of State doing overseas construction. My office is located overseas. We have a DOSAR waiver from FEDBIZOPPs for under $5M. However, we are expected to use full and open on all construction not restricted by law or treaty (I haven't seen one yet). We use our own web site for advertising and expect the Post Facility managers to do market research and provide suggested firms for us to mail solicitations. On any given project we will have local companies, companies from neighboring countries and U.S. firms all competing even down to projects as small as $300K. We do not get involved in permits and licensing issues. The solication says the offeror must have permission to work in the country by the time of award. If he can't produce the proof that is his problem and we go to the next best offer (and yes that comes up often and we even had to T4D one mistake we made). We have the post discuss the permitting at the site visit/prepropsal conferences so they are all on notice.
If we do any restrictions it must be supported by J&A IAW FAR part 6. Some of our Bureaus have authority from Congress to restrict for polictical and other considerations. This is also supported by documentation on a case by case basis. This authority is used infrequently, is used for good reasons and is not abused in my opinion.
So, I do not think there is a blanket authority to limit competition to local companies but should be supported by J&A on a case by case basis.
P.S. It appears our webite is becoming so well known by U.S. companies that we might as well advertise on FEDBIZOPPs. Being overseas we do not have to consider small business and get no credit if we did so the competition is truely full and open and the firms as well as our customers really like that.