What this setting will do is determine how your navigational components are handled. (TOC, Index, Glossary, Search).
If Web Site is selected, they are broken into smaller segments that are more easily shipped. If Local PC is selected, things are kept in single files. The trade off is that with Local PC selected, it may take a bit longer on initial load for the TOC, Index or other area of the pane to load up.
Does choosing Local PC make the total file size of the WebHelp smaller or bigger? Right now it is about 34 MB. I send WebHelp to Frontpage for publishing and total file size can be an issue? If Local PC makes the total file significally smaller I could switch. I quess I could try it.
Interesting question. I suppose it may make for a smaller overall footprint. But that would likely only happen because of fewer files.
Pesonally, I'd be totally shocked and surprised if you noticed a significant difference either way. At best, I'd expect it to be within a few hundred bytes.