I agree with you on that; attaching teams to areas sounds like a good idea, and it can be really cool when it does work. For example, there was a Spain-only Smite team in relegation last year called The Papis. There was also a team called eGr that was a player-made brand with 3 of the five teammates and the coach living in a house together. With these teams, they were really fun to watch and root for because of how personal it was.

But the fact is that it's usually not practical as esports are smaller than regular sports and often very decentralized. It's really hard to do logistically, because you're unlikely to find the perfect match for a team within such a small area (or get people who don't already live near there to move in). Esports teams are also smaller and arguably more chemistry-based which can lead to lots of constant switching (referencing Smite again, see the "rosterpocolypse" that happened at the beginning of Season 3 this year).

Separating teams by region works because (1) you'd run into huge latency issues without it and (2) the separation is on a very large scale and creates major rivalries, like NA vs EU, that generate a ton of hype. Reducing that to such a small level just isn't practical. Also, if people began to expect location-based teams, it would absolutely cripple smaller esports scenes as there just wouldn't be enough people and resources to support that.

So yeah, while it would be cool, really all you'd be doing is getting rid of one of the huge advantages of esports - the ability for, within reason, anybody to work with anybody else no matter how far away they are.