To get them out of your hair and keep them out of each other's hair. My DH started doing it when he was able to rent a beach or lake house. The place was already rented and allowing each kid to bring 1 friend gave them someone to hang out with and actually gave him a more relaxing vacation as a single dad. It's not for everybody, and there are kids you do NOT want to take along. But one of SS's friends is practically another family member so it's almost a given that he's invited. We only do this when the venue allows - like a rental house where we stay in one place. We didn't bring any friends on our UK trip.
Oh, and even though we don't bring friends for DD yet, the older ones were very good about including her and taking care of her so we could get a break or *gasp!* a date!
When I was a kid, we often joined our cousins at the campground where they spent most of their summers in the RV. I guess this is just non-relative kids vs the relative kids I grew up with.
On the flip side, SD was also invited to go along with a friend last year, so that was nice.
I'm fine either way, but honestly sometimes I like the borrowed kid better. Borrowed kids often behave better for people who are not their parents. ;) But we did have one where we almost had to call her folks from our stop 3 hours in and ask them to come get her. Choose wisely.
And, DH and I grew up with less money for vacations (if we had them) so sometimes we know when we are able to offer, this is the only opportunity for that child to go on vacation that year. We don't ask for money, other than the child receiving spending money. We dine out once during our lake week at a nice place. Every other night is dining in. Often we have been offered money, but it's never required. Most of what we do is "well, it's nothing extra" for those 2 people so it doesn't increase our costs much. These friends are also only friends where we know them well, and we know their parents (and they know us). No random friend from school.