It's part of it.

Nepotism entangles organizational interests with personal interests, in both good and bad ways. It means that someone may hire a friend or family member because they know they're a) competent enough for the job, and b) they actually, personally know them, which significantly reduces a risk of the hire turning out bad, relative to a stranger with equal or better credentials. But it also means that someone may hire a friend or family member because they're trading favors, which is bad for the organization[0].

I suppose in practice the latter might be more common - I'd guess it could be the whole idea has structural dynamics similar to "the market for lemons". I haven't spent much time thinking about it and researching the problem in depth, so I can't say.

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[0] - And may or may not be bad for the local community. I suppose the larger problem for organizations is simply that they're designed to be focused, and need to maintain alignment of incentives across the org chart. Nepotism is a threat because it attaches new edges to the org chart - edges that lead to much more complex and fuzzy graphs of family and community relationships, breaking the narrow focus that makes organizations work.