Why does Hollywood not use foreigners in foreigners' roles?

In addition to the other answers:

There are factors used in determining whether an actor gets a part other than whether they come from the foreign country.

Remember these people are actors, and so their job is to pretend to be someone they're not. For any given character, the casting people must determine which actor is the best fit for the character and can effectively portray that character in the manner that the film/show requires. There are a number of factors in that, their look, their demeanour, their ability to show the emotions felt by the character, to put on their mannerisms and disposition, etc. Not to mention the reputation of the actor themselves which can help with ticket sales.

So if there is an Estonian character, and there are Estonian actors in Hollywood, it doesn't mean that any of those actors are the right fit for this character, and the casters probably don't want to limit their choice of actor to just Estonians, if they can train what they believe to be a better actor (by which I mean better for this particular character / film in their opinion) to do a believable enough Estonian accent that it will not bother the majority of the audience.

Actors union/guild. Unions is probably your best answer. Even down to the crew who shoots the movie. Just look it up. You can not just walk around them- they are deep into it. I only know this because my friend works over there and complained about all this (so I was partway listening lol).

It is really annoying to see the roles where “fluent” or “native” speaker twists a foreign language. It is embarrassing.

You should consider that maybe most of the target audience probably does not agree with this statement. Since most of the audience does not even know a word of Russian they will probably not notice anything wrong.

Similar example: I am often bothered by butchering of science in movies, but me and people like me probably make a very tiny fraction of target audience, so movie makers do not bother to make us happy.

Upon further reflection, and after reading other answers and comments, it occurred to me there may be an another answer to the question, if one considers the implications of geography.

Could the following be considered the same question,

"Why does {{ INSERT A LOCAL HERE }} not use foreigners in foreigners' roles?"

If so, I would point out, it's a function of A, geography. B, casting of available/accessible talent. C, target market, and perhaps D, production considerations/dynamics.

My point is, there are certain dynamics at play, what those are exactly I don't know can ever be enumerated, fully.

But I would suggest geography may play a senior role.

And if so, you could say,

Well marketed, established Hollywood actors, play in Hollywood movies.

Or perhaps the opposite,

Unknown, not well marketed, Hollywood actors, don't act in Hollywood movies.

Or an extremely, geographical twist,

Actors from, (insert your local here), who are not known in Hollywood, don't act in Hollywood movies. And if framed that way, simplifies the answer considerably.

Now, if you have the question,

"Is it immoral or ethically wrong for roles to be cast with actors who do not accurately represent the character's ethnicity or accents"

I would suggest, perhaps, that is a great topic for a new question.

Great answers here, but an issue I don’t see highlighted as much as I think it deserves is that

Hollywood is extremely risk-averse.

Feature films have enormous budgets, and turning those budgets into successful films that actually make a profit is a difficult task. As budgets increase, the difficulty of recouping the expenditures increases in turn. And we have seen a lot of extremely-high-budget films. Anything that can lower the difficulty—increase the odds of success—is prized highly by the people with the money, who are the people that are really in charge.

What this means is that Hollywood is fairly well obsessed with minimizing risk. That means you want the most established, famous, likely-to-draw-more-crowds actor you can afford for every role. The more minor the role, the less budget you have to fill it—a big famous star in a leading role can draw huge crowds just by slapping their name on the film, so Hollywood is willing to spend a lot of money on that role. The same actor can’t draw the same crowds in some more minor role, so they aren’t worth hiring for that role—that role must be filled more cheaply. The more minor the role, the less money the studio can spend filling it.

Eventually, for the more minor roles, the cost of actually hiring the actor isn’t even the limitation—it’s the cost of finding them in the first place. Putting out ads, running auditions, any negotiating you have to do, and so on, can cost more than the actor you end up hiring will. So Hollywood cuts costs on those as much as they can. “Good enough” carries the day.

A big, established director or producer or what have you can push back on the financial bosses—because the big, established director or producer themselves represents a certain amount of protection against risk (they are, presumably, established for a reason, so increased odds that they’ll put together something good, plus their own name can draw crowds even if they mess up in this particular production). That gives them a bit of a “budget,” so to speak, to push for risks. But it’s limited, too. They have to pick their battles. And they’re going to lose some of them. And the less established they are, the less ammunition they’ll have for it.

This is all predicated, of course, on Hollywood’s calculation that these casting choices won’t substantially affect audience draw. Spending money to find an actor with the right accent, or even better, the actor who is actually native to the same area as the character and so can be considered an expert on what the right accent is in the first place, doesn’t draw enough of a crowd, in Hollywood’s estimation, to be worth the cost. Or, more accurately, isn’t likely to do so. Spending that money with a low chance of it making you as much money in return is a risk that Hollywood isn’t taking.

The good news here is that audiences are—slowly, gradually—changing to care more about these issues. I don’t know that we’ll ever get to a point where the precise accent of the region in question is going to be seen as a worthwhile choice by Hollywood, but at least we’re seeing push-back on some of the most glaring issues. Blackface was once employed as a way to have a white actor play a black role—that hasn’t been remotely acceptable for a long time; for a while now, the only time it was used was ironically, and even that is getting very dim reception these days. White-washing—just changing the minority character into a white character—was seen as an “acceptable improvement” over blackface for a while, but audiences are starting to object pretty heavily to that too. Scarlett Johansson’s casting as Motoko Kusanagi—renamed to just “Major”—in Ghost in the Shell raised an uproar, cost that film a lot of money and hurt her reputation—I’m guessing both she and the studio heavily regret her involvement in the film. Tokenism—having a singular example of some minority as pure lip service towards the idea of diversity—is heavily criticized and Hollywood is learning to avoid it.

As these things happen, Hollywood changes its calculations about what is and isn’t risky. If these practices are seen as risky—having a chance of engendering outrage at your film rather than interest—Hollywood will respond to that. Spending more finding the right actor for a role has some risk—all costs represent risks—but if doing it poorly is even more risky, because of the chance that it will turn audiences away from the film, then Hollywood will spend the money.

I see this has three bases…

1. Budget

2. Actor's box-office value

3. Whether or not casting can tell the difference. This is a big one!

Let me take a slightly different perspective, as I work in London not Hollywood.

Non-British actors playing "British" for staters.
You've all heard Mel Gibson playing Scots, or Dick van Dyke playing a Cockney. These are just the tip of the iceberg. Across the years, the number of Americans with simply abysmal British accents is heart-breaking.

I can hear minor aberrations in British accents like you can tell the difference between Estonian and Serbian. I can't. Most people outside those areas couldn't, so they all get through on Reason 3.

Even British actors playing British parts don't always get it right - Game of Thrones… a whole slew of dodgy "Northern" accents, enough to make you wince. Some were spot on, Sean Bean and Mark Addy set the bar, as true native Northerners, Sheffield to be precise. Richard Madden - a Scotsman - did a really good job of copying them. After that it all went a bit downhill. Neither casting nor 90% of the show's audience would be able to tell that a great percentage of the rest of the 'Northern' cast only managed "something that might be somewhere near Manchester if you're not listening too carefully".
They also got through on Reason 3.

Anyway, back to Americans playing Brits - and vice versa.
Over recent years, many actors have spent considerable effort brushing up on their accents. Compare Hugh Laurie in House Season 1 vs Season 8. To start with I don't know what accent he was trying to do. By the end, I'd say he'd pretty much nailed it.
Another I've worked with - Elle Fanning. In Maleficent… not so good. In The Great, nailed it.
Some are so good that once you've checked where they were born on IMDB, you still wonder how they did it. Such as Meryl Streep and Christian Bale fit this category.

If casting want a certain character actor, then the job has traditionally gone to the best actor for the part, not necessarily the best accent copyist. This is, fortunately changing, but because the actors are taking the time to actually get the accents right. The entire industry is becoming much more aware of this in recent years. I've worked on shows where to play a Russian, you have to be a Russian, German to play a German, etc. I've also played parts myself as a German, in German - but on that occasion the script supervisor was so bi-lingual it was impossible to tell which was her native language. She made certain no-one got it wrong. If anyone's accent slipped, we'd be going again.

So - there is hope on the horizon.

I live in Hollywood, and have many friends in the business.

Believe it or not this comes up in our conversations quite a bit.

From what I understand, the issues are mainly around casting, and availability of talent. More and more Hollywood is moving to be more diverse, which is great. Add to that "it's not what you know, it's who you know" definitely plays it's part.

This is not entirely the case from what I have seen. More frequently, a specific type of character (Russian, for instance) is played over and over again by the same, small, group of actors well known in the entertainment community. The same Russians get the same Russian parts. The same Italians get the same Italian parts.

If the part is too small to bother, or the actor sought is not available, studios don’t bother trying to develop new talent for a one shot deal. They would rather go with someone who can get close to acting the part. And, they will count on the audience suspending their belief for the sake of the storyline. The belief being that it is better entertainment to have good acting than realistic portrayal. Especially when the portrayal of the character must be exaggerated for the audience to get what would normally be subtleties.

Case in point, I like action movies. Combat movies are shot predominantly with actors who have never been trained in combat. Instead, they go through a crash course on combat techniques. Then, their scenes are choreographed for the maximum visual effect. The audience impact is valued over the actual realism. Even if it means that certain effective combat techniques are replaced with those that would go against actual training, be ill-advised, or be down-right disastrous in actual combat. When actual combat veterans are cast in speaking roles, the realism of combat scenes increases. But, the acting and dialogue quality suffers. It is not in the combat veterans’ skill set. Can it be taught/learned? Yes, at the expense of time. But, it is much easier to teach an actor how to act like the character at the expense of realism.