Due to Mozilla’s security model, file://-links to local files on your computer or files on a network share do not work on (non-local) web pages; a click on such a link just does nothing. Links to local files could be useful on intranet sites like wikis.
The LocalLink extension is a little Firefox (and Thunderbird) extension, that adds a new entry “Open Link in Local Context” to the link’s context menu. After you have installed the extension from https://addons.mozilla.org/firefox/addon/281, you can open file://-links by right click on the link and select “Open Link in Local Context > Current Window”.
Since the LocalLink extension only opens local links on user requests and does not add any automatism (e.g. for JavaScript or image links), there should not be any security issues. You can find more information about why local links are disabled by default in the following bug requests: