I wrote most of this as a comment in the "should we buy more internationals" thread, but it's long and someone asked for it to be in a fanpost so I thought I'd clean it up and post it here.
Some have questioned LFC's "buy British" transfer policies and/or suggested purchasing more internationals. The thinking is that there is a big premium for even mediocre British talent and bargains to be found elsewhere. Some have suggested that FSG or Kenny were even biased against non-British players. Unfortunately, it's not as simple to buy up all the young, talented internationals.
That's because of the new squad rules which came into effect during the 2010/2011 season. According to these rules there are actually three kinds of players:
2. Youth (under 21)
3. "Homegrown", defined as any player (regardless of nationality) who spent at least 36 months in an English or Welsh academy prior to their 21st birthday.
The new squad rules dictate that each team must declare a 25-man (or fewer) roster at the end of each transfer window. These are the only players allowed to play in Premier League games (players not declared on this roster may still playing in Europe or domestic cup competitions). Of these 25, 8 must be homegrown. Players still under the age of 21 do not count against the 25 and may play in the Premier League. If you don't have 8 homegrown, then you must subtract one squad position for each man you are short.
For example, in the 2010-2011 season LFC only had four homegrown players so they could only carry a 21-man squad, and one of those places was taken by someone who never played (Darby) just because he was homegrown. That obviously affects your depth, your ability to rotate players, your tactical flexibility.
The point of this policy is to force teams to invest in their youth systems -- which are generally lacking among their European peers -- to encourage English player development that will eventually benefit the national team. It is also to disincentivize buying a whole foreign squad with oil money (say). Like many teams, LFC has responded to this policy by placing much greater importance on building up their academy in the past few years, but it takes awhile for that to bear fruit and comes with no guarantee. And the meantime they found themselves with not enough homegrown players capable of contributing to the squad.
Because 1/3 of the squad has to be homegrown, it incentivizes three types of transfer activity:
1. Filling the role player slots with relatively inexpensive homegrown players (this is why we got Brad Jones)
2. Paying whatever it costs to get talented British players. You have to have 8 of them to carry a full roster. If you want those players to be useful, you’re going to have to pay.
3. Signing foreigners when they are very young (17 or so) so that by the time they are 21 they will count as homegrown.
At the same time, it disincentivizes buying marginal foreign players. You have to make those slots count, so gambling on a few guys who might come good can really hurt you: if they fail to perform, then you can't just go out and get another one without deleting someone from your squad first.
When Hodgson took over the team only had 4 homegrown players and very little money available for transfers. He couldn't sign any more foreign players without selling some first. That’s why he basically had to buy Konchesky and Jones (or players like them) to fill roster spots. To get a potentially useful homegrown player he signed Cole. He couldn’t add to the squad without more homegrown, and he didn’t have the money to buy good players, so he did the only thing he could do: acquire mediocre British players.
Here are our homegrown players now: Jones, Gerrard, Cole (if he stays), Carra, Carroll, Hendo, Spearing, Downing, Johnson, Kelly. (Flanagan, Robinson, Shelvey are all under 21 so they don't count against the 25.) That’s 10. If you subtract Carroll, Hendo, Jones, Downing, and Cole (i.e. the recent signings that many are complaining about) then you’re at 5. Under that condition any players that you add to the squad must be homegrown, which generally means English. Period. No wiggle room.
We overpaid for Carroll and Hendo because they’ll be with the team for a long time (maybe a decade) as 25% of our homegrown players who can actually contribute to the team. That’s a valuable commodity. For that reason it comes at a high price. We added Jones because somebody's got to be a backup goalie, so why waste that spot on a foreigner? Save it for somebody else. We added Downing to give a bit of wiggle room, which will be necessary as older players like Carra and Gerrard are eventually phased out. (Adam does not count as homegrown, I don't think, but he is also our cheapest transfer since FSG took over.)
The bottom line is that you only want to sign foreigners if they’re impact players (like Suarez) not squad players or backups (like Maxi), you want to have a few players under 21 that can contribute when needed (think Sturridge, Wilshire, Coates), and you want to collect as many top talent British players as you can afford. The problem for LFC right now is that most “impact” foreigners are being pursued by clubs with more money and the opportunity to play in the Champions League. You can take a few gambles on potential but not too many, or your squad can get busted up bad real quick. Having Aurelios and Maxis clogging up your roster without contributing means that you can't add useful players, and your depth and tactical flexibility suffers. Having Aquiliani not only doesn't help you, it actually hurts you.
Before the transfer season in 2010 we had too many marginal foreigners and too few useful Brits — that’s Rafa’s doing. So we added some Brits over the next few windows until we got a small surplus of homegrown players. Now we have the flexibility to add anyone we want at any position of need. We can phase out Carra without having to spend 25mnGBP to replace him with someone like Lescott. We don't have to force some kid on the roster who will never play... we can use the spot productively.
Without the likes of Hendo and Carroll on the roster it actually gets harder to add new players. That’s why they’re so expensive. But now we have a different problem: we have a full 25 man squad, which means that to buy someone new someone else has to go. This is why players like Aurelio and Maxi really need to get off the team. Maybe Kuyt too. Cole and Aqua should only come back if they’ll be used. Afellay should only be purchased if they’re sure that he’ll be a big part of the team’s plans. Etc.
I doubt FSG’s policy of buying young Brits was ever intended to be permanent; more likely it was designed to set the squad up in such a way that in future windows we could go after whoever we want — foreign or domestic — without having to juggle the squad around too much. We don’t need to buy British now, but we did until now. So we did. And we paid for it. But we're set up with young homegrown players for the foreseeable future now, and that gives us a lot of flexibility.