RPGs are big. Huge, even. And, because such a large part of the draw of an RPG is exploring a new world, that size is an asset in ways that it wouldn't be in other games. Fallout wouldn't have been Fallout if it was three blocks of Downtown LA; you wouldn't have had the opportunity to see how all of those different communities responded to the post-nuclear world if the game didn't provide the sense of scale and travel that it did.
Or, at least, it wouldn't have been believable. The opportunity to become a tourist of imaginary worlds - and to meet, converse with, and subsequently cleave through their denizens with +2 Greatswords - is a core draw of RPGs. With Storm of Zehir, Obsidian wanted that sense of scale and exploration to be their primary focus - much more so than in previous Neverwinter Nights games.